Using Sharpe Ratios to Assess NightShares ETFs | ETF Trends

Analyzing funds’ Sharpe ratios can be a useful tool in assessing whether investors are being rewarded for taking on additional risk.

NightShares launched three ETFs in 2022 that offer exposure to the overnight session, which has historically outperformed the daytime trading session on a risk-adjusted basis, evidenced by a higher Sharpe ratio. This market anomaly is referred to as the night effect.

As advisors look for ways to reduce volatility and enhance diversification in client portfolios, the NightShares 500 ETF (NSPY), the NightShares 2000 ETF (NIWM), and the NightShares 500 1x/1.5x ETF (NSPL) are worth consideration.

“While most investors think of the stock market performance connected to daylight hours, after hours trading has provided strong risk-adjusted performance historically and could add some potential diversification benefits,” Todd Rosenbluth, head of research for VettaFi, said.

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.

NIWM, conversely, 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.

The NightShares 500 1x/1.5x ETF (NSPL) offers exposure to both night and day sessions: providing investment results, before fees and expenses, that correspond to 100% of the performance of a portfolio of 500 large-cap U.S. companies during the day and 150% of the portfolio performance at night.

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