ETF of the Week: NightShares 500 1x/1.5x ETF

Launching last fall, NSPL is an unusual fund. While a majority of trading happens during the market’s hours, Lydon noted, “there’s a whole other market that goes on after hours and a lot of people participate in those markets.” NSPL is a fund that seeks to capture the night effect. According to data, overnight markets have historically outperformed the daytime trading session on a risk-adjusted basis.

NSPL allows investors to be invested 1x in the daytime S&P 500 and 1.5x at night. “There’s a little bit of leverage in the nighttime performance,” Lydon noted, pointing out that since 2003 the S&P 500, on a buy and hold basis, is up 9.7%.” He then added that by being invested 1x in the day and 1.5x at night, “you can get a return, over that same 20 year period of time, of 13.06%.” The Sharpe ratio is also less, meaning investors can get better performance for less risk.

“Innovation in ETFs isn’t slowing down,” Lydon said, explaining the unique nature of NSPL. When asked where it fits in the portfolio, Lydon pointed out that investors can take some of their S&P 500 allocation and diversify it with this fund.

Jaffe noted that the statistics are clear on the performance, but that back testing is somewhat controversial.

Lydon responded, “you bring up a good point. Most ETFs wouldn’t come to market unless there was back testing.” He added that, with 20 years of data on the S&P 500, there’s not a lot of wiggle room. The data is very hard to tweak. “It’s pretty clear, for sure.”

Of course, inverse and leveraged funds have a weakness: tracking errors. Those errors grow over time, making buying and holding them fraught. Lydon offered, “even though at night there’s 1.5 leverage, in the morning it’s done. You’re back to owning just the S&P 500 with no additional leverage. It resets every day.” This abolishes the usual concern of tracking error and makes the fund buy and hold friendly.

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