Understanding the Impressive Liquidity Underlying NSPL

Capturing the night effect does not require playing in illiquid markets, a common misconception among advisors.

NightShares ETFs offer targeted exposure to the overnight trading session, efficiently and cost-effectively capturing the night effect. The night effect is a market anomaly whereby overnight markets have historically outperformed the day session on a risk-adjusted basis. The night session tends to contribute most of the returns, while the day has contributed most of the volatility.

“It’s a bit counterintuitive to people that the night is a lot less volatile historically,” NightShares CEO Bruce Lavine said on June 26 during “Using NightShares’ NSPL to Tilt to the Night.

“People say, ‘Well, bad things happen when I’m asleep, and I fear the night,’ and they think about thin trading and all that,” Lavine added. “None of that’s really coming into play here… because it’s just a buy-and-hold overnight.”

The NightShares 500 1x/1.5x ETF (NSPL) provides leveraged exposure to the overnight trading session. NSPL seeks to provide returns that correspond to 100% of the performance of a portfolio of 500 large-cap U.S. companies (comparable to the S&P 500) during the day and 150% of the portfolio performance at night.

Understanding the Liquidity Underlying NSPL

Due to the fund’s unique exposure to the overnight session, many advisors may be surprised to learn of the incredible liquidity underlying NSPL.

NSPL provides daytime exposure to the S&P 500 via a long-term core position in the iShares Core S&P 500 ETF (IVV). IVV makes up about 71% of NSPL’s daytime position, with the other 29% comprising cash and futures, Lavine said.

“It can’t be 100% in IVV because we need the excess cash on hand to support what we do at night. But again, it looks very much like an S&P 500 fund during the day,” Lavine said. “Our cash gets a 3.6% yield, and we are in the futures, so that’s the core position.”

NSPL gets the extra exposure to the night session by buying an extra 50% of the value of the fund into futures at night and then selling them the next morning.

“We do it in a very efficient way by using essentially the most liquid contract in the world: the S&P 500 e-mini future,” Lavine said.

Ken Nuttall, CIO at BlackDiamond Wealth Management, a Manhattan-based registered investment advisory that uses NSPL in portfolios, said liquidity wasn’t a big concern with NSPL. “The underlying is IVV and [the S&P 500 e-mini future], which are probably two of the most liquid assets you can have out there on the S&P,” Nuttall added.

Nuttall said BlackDiamond Wealth Management trades NSPL on a daily basis and has never encountered an issue with pricing.

“When we do trading, like any ETF, we always use limits. [NSPL] does have a pretty tight bid offer,” Nuttall said. “If you got a larger-size trade, you can just go out to your friendly market maker, and they’ll get you good pricing.”

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