These ETFs Will Meet You in the After-Hours Club

Artificial intelligence-powered hedge fund runner and now exchange-traded fund issuer AlphaTrAi updated a new product filing under the nightshares brand outlining three new after hours funds. Let's take a look. The three names are the Nightshares 500 ETF (NSPY), Nightshares 100 ETF (Ticker to be announced), and the Nightshares 2000 ETF (NIWN). The strategy here is to buy the close and sell the open, meaning the fund would be in cash during regular trading days and hours and be fully invested during times the markets are closed overnights and weekends and holidays. To be clear, these funds have not yet launched. I saw this filing and thought it would be interesting to review the strategy and do some backtesting of my own. While the issuer is new, the team is well tenured and led by industry veteran Bruce Lavine who, among other things, is the former president of Wisdom Tree and has held C-suite positions at iShares Europe. If you're like me, you spend a lot of time reading updates about after-market and pre-market action on individual names as well as markets in general and wonder, what would be the best way to get access to these prices? Various retail brokers do offer access, but, honestly, if you're worried about institutional players beating you to the punch during the trading day, then pre- and after-market hours are not for you. Of course, for broad market indexes, these are the futures markets. But individual companies (in the U.S., at least) currently have no equivalent. Exchange-listed single stock futures were available to U.S. investors after the Commodity Futures Modernization Act of 2000 up until they ceased trading Sept. 18, 2020. With regard to index futures trading, see my earlier point about institutional players. Trading Outside Regular Market Hours Overnight equity exposure is not a new concept. In fact, I was able to find papers from 2021, 2018, 2015, and one as far back as 1985. After a cursory review of the abstracts of each of these papers, it seems like 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. The nightshares products seem to be based on the S&P 500 Index, the Nasdaq 100 Index, and the Russell 2000 index given the fund names and tickers. I pulled 20 years of historical price data for each of the existing ETFs tracking those indexes and prepared the charts shown below. The funds used in my studies are the SPDR S&P 500 ETF Trust , the Invesco QQQ Trust , and the iShares Russell 2000 ETF . The below charts show the cumulative daily difference between investing during trading hours (prior day closing price to current day closing price) and trading the overnight (prior day closing price to current day opening price). I've also overlaid 20-, 10- and 5-year periods so you can get an idea of how these strategies would have performed during those periods. Points above zero indicate the overnight strategy is dominating the trading hours approach. My Takeaways While not a peer-reviewed academic study, this tells me that higher volatility names are often driven by headlines and companies often release news -- and always release earnings -- outside regular trading hours to mute any outsized impact on their stock price. While all the 20-year lines have different outcomes, they all exhibit the same behavior from 2008-2009. This period had? Historically high volatility that created an environment in which markets were hypersensitive to any news whatsoever. Further, when I calculated annualized volatility over the 20-year period I measured SPY volatility at roughly 19%, Invesco QQQ fund at roughly 22%, and the Russell 2000 fund at approximately 24%. Interestingly, overnight volatility was on average about half the regular market volatility as measured. I believe this is borne out by the magnitude of the historical returns as well. As you can see by the above charts there are periods when these strategies work and periods when they don't. Inasmuch as the markets are said to not like uncertainty it seems to me anyway, that these funds, once launched, will allow investors to capitalize on this trait. I'm interested to see these funds come to market and how they will provide investors and traders alike a new way to, as the industry likes to say, express their opinion.

These ETFs Will Meet You in the After-Hours Club

Let's check three funds that are set to buy the close and sell the open.

Columnist Conversation

Very Cautious

This Weekend on Real Money

AAP Podcast on the Fed Decision!

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.