Just because the market closes at 4 p.m. ET, does that mean the world stops turning and markets around the globe abide by the same schedule?
I think you know the answer to that, but still, much is up for debate, which brings us to a trio of NighShares products.
Earlier this year, NightShares put forward some funds that were to take advantage of what they call the "night effect." In short, that's when off-exchange trading occurs. Academic debates have argued just how efficient "Efficient Markets" are. The mere fact that actively traded stocks rarely have the same next-day open price as the prior-day closing price tells me that they are indeed fairly efficient. After all, there's a reason why companies don't announce earnings during market hours, who needs all that volatility?
Back to NightShares. The company launched its first two funds on June 28. The NightShares 500 ETF (NSPY) and the NightShares 2000 ETF (NIWM) . Both have a 55-basis point expense ratio meaning a shareholder with $1,000 invested over a calendar year would pay $5.50 in fees over that period.
As you can see from the table below, both have underperformed their daytime versions since launch. My gut tells me that the combination of periods of steady close to open decline as well as some of the whipsaw action we've been seeing (markets opening down but closing up) have played largely into this. For some, five months may be enough to make a final decision about this approach but like many investments, timing is everything and it's always best to keep ideas like this on your watchlist.
Source: Factset, All You Can ETF
What's Next?
If you take a look at the Statement of Additional Information for NSPY and NIWM, you will see that NightShares also contemplated launching a Nasdaq 100 Index focused ETF, an S&P 500 covered-call strategy and what is listed as 1-times/1.5-times levered products. Well, on Oct. 6, it had a follow-on offering with the launch of the NightShares 500 1-times/1.5-times ETF (NSPL) . This fund has a 67-basis point expense ratio, so one years' fees on $1,000 would be $6.70. If you're wondering about the "1-times/1.5-times" designation, here's the skinny. This fund provides 1-times long exposure to day markets and 1.5-times exposure to overnight markets. Essentially, it's long the S&P 500 index with a levered position in SPX futures during overnight, weekend and market holiday periods.
Remember earlier when I talked about how timing is an element of the success of a strategy? Looking at the since inception returns for NSPL as compared to NSPY and the SPDR S&P 500 ETF Trust (SPY) in the table below, you can see that not only has NSPY outperformed SPY but NSPL has outperformed them both.
Source: Factset, All You Can ETF
Not saying these return characteristics will persist but as I've said, definitely something to put on the watchlist.
Wrap It Up
As I said in the previous article, the night effect is something that has been written about for a while. I was able to find papers from 2021, 2018, 2015, and one as far back as 1985. Overall, there is a general consensus that markets do behave differently and at least one study seemed to indicate that there were opportunities for outperformance on an individual stock level trading the overnight market. One important note for investors is that these studies are based on years of results so if you do end up investing in NSPY, NIWM or NSPL, understand that your time horizon should be in the scope of an economic cycle and not months or even quarters.
