Ever wonder what goes on with equities between when the U.S. markets close at day's end and open the next morning? While you’re sleeping your stocks are not, and that evidently can have a measurable impact on the price performance of U.S. equities. Or, to steal a line from a new exchange-traded fund provider called NightShares, the difference could be night and day.
NightShares recently launched two ETFs designed to capitalize on the so-called “night effect,” a phenomena where overnight equity markets often outperform daytime markets on a risk-adjusted basis.
The company’s first two products—the NightShares 500 ETF (NSPY) and NightShares 2000 ETF (NIWM)—are perhaps the first investment vehicles aimed exclusively at capturing the night effect.
“I don’t know of any registered funds available to the general public that seek to isolate this effect,” said NightShares CEO Bruce Lavine.
The NSPY fund is focused on the night performance of a portfolio of 500 large-cap U.S. companies, while the NIWM fund keeps a nocturnal watch on a portfolio of 2,000 small-cap U.S. companies.
The night return is measured from the close of regular daytime trading in the U.S. market at 4 p.m. ET to the open of the next trading day at 9:30 a.m. ET. The night return is calculated as the percent difference from the opening price today versus the previous day closing price.
“This is something folks in the trading community knew existed but had a hard time harnessing it,” said Max Gokhman, president and chief investment offer of Alpha TrAI, which owns a 52% stake in NightShares. Alpha TrAI is a four-year-old San Diego-based asset management firm that employs artificial intelligence to construct investment products. Its CEO and chairman is former LPL Financial president Bill Dwyer.
Alpha TrAI formally launched NightShares in January 2022. Its leader, Bruce Lavine, previously was a long-time executive at ETF provider WisdomTree Investments.
“[The night effect] is quite pervasive,” Gokhman said. “You can slice it several different ways through indices and individual securities and sectors, and you’ll see patterns where the night effect tends to be pervasive and more attractive on a risk-adjusted basis.
“We wanted to bring it to an ETF to where anyone can trade it,” he continued. “We found a lot of research on this based on the S&P 500, but we saw there are other indices that are more attractive regarding day versus night session differentials.”
The company has additional night-effect themed ETFs in registration with the Securities and Exchange Commission that involve different takes on the large-cap market, a mid-cap equities product, and large cap-oriented leveraged offerings.
Why The Night Effect Exists
Gokhman explained that Alpha TrAI identified the night-effect trend in its own investment research and subsequently found various academic research that described this trend.
One upshot from this research is that investors can benefit from avoiding the volatile day sessions and investing in the period between U.S. market close and market open.
A research paper by an economist at the Federal Reserve Bank of New York and two professors at the Copenhagen Business School, first published in February 2020 and updated in September 2021, described an "overnight drift" during the 24-hour electronic trading period as S&P 500 Index futures receive a bump up in price during the opening hours of the European markets in London and Frankfurt. The authors attributed that in large part to inventory management and concluded that “high frequency returns become predictable as market makers transact with new participants arriving overnight, trading away order imbalances remaining from the previous U.S. trading day.”