As advisors continue to look for ways to reduce volatility in client portfolios, tilting toward the night is an important strategy to consider.
The night effect is a persistent phenomenon whereby overnight markets have historically outperformed the daytime trading session on a risk-adjusted basis.
The historically lower volatility of the overnight session may lead to better up/down capture ratios, allowing investors to more comfortably maintain their target equity exposure through periods of market turbulence, such as the current market environment.
Looking at the Sharpe ratio for the various trading sessions (day, night, and hold) highlights the power of the night effect, which has historically delivered the highest returns while factoring in risk and volatility. The ratio offers insight into how much excess return is received in exchange for the extra volatility caused by holding a riskier asset.
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.
During the same 20-year period, the power of the night effect is even more pronounced among small 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.
NightShares launched three ETFs in 2022 that are designed for investors to efficiently capture the night effect.
The NightShares 500 ETF (NSPY ) offers exposure to the night performance of 500 large-cap U.S. companies, while the NightShares 200 ETF (NIWM ) provides exposure to the night performance of 2000 small-cap U.S. companies.
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.