NightShares ETFs Reduce Volatility, Increasing Risk Budget Elsewhere

Investors can use NightShares ETFs to dampen volatility in a portfolio, effectively increasing their risk budget elsewhere.

Tilting toward the night is an important strategy to consider as investors look for ways to strengthen returns. The night effect is a persistent phenomenon, whereby overnight markets have historically outperformed the daytime trading session on a risk-adjusted basis.

That’s because the historically lower volatility of the overnight session may lead to better up/down capture ratios. As a result, investors may be able to increase their risk budget in other parts of their portfolios.

Investors can gain exposure to the overnight session of the market with NightShares ETFs, including the NightShares 500 ETF (NSPY), the NightShares 2000 ETF (NIWM), and the NightShares 500 1x/1.5x ETF (NSPL).

Inside The NightShares ETFs: Performance, Holdings

NSPY offers exposure to the night performance of 500 large-cap U.S. companies (comparable to the night session of the S&P 500). Looking at the past 20-year record (2003 through 2020), the SPDR S&P 500 ETF Trust (SPY) Sharpe ratio is 0.54 for holding the fund. Meanwhile, during the same period, the night session Sharpe ratio is 0.62, while the day session Sharpe ratio is just 0.16.

For small-cap exposure, NIWM provides exposure to the night performance of 2000 small-cap U.S. companies (comparable to the night session of the Russell 2000). During the same 20-year period, the power of the night effect is even more pronounced among small-caps than large-caps.

The iShares Russell 2000 ETF (IWM) Sharpe ratio is 0.46 for holding the ETF between 2003 and 2022. The night session Sharpe ratio is 0.90, while the day session Sharpe ratio is -0.08. The day session Sharpe ratio is negative, as the session’s returns over the 20-year period have been negative, meaning over 100% of the fund’s returns have come at night.

For investors looking to maintain some exposure to the day session, the NightShares 500 1x/1.5x ETF (NSPL) tilts toward the night, providing investment results, before fees and expenses, that correspond to 100% of the performance of a portfolio of 500 U.S. large-caps during the day and 150% of the portfolio performance at night.

For more news, information, and analysis, visit the Night Effect Channel.