Advisors have a plethora of ETF offerings to choose from and are now not only able to choose the “what” of their equity exposure, but also the “when” — whether to invest in the day or night sessions.
The overnight session often behaves better than the day session in that it frequently captures much of the upside while avoiding significant downturns. This is referred to as the night effect, a phenomenon whereby equities have historically performed better when local markets are closed than when markets are open.
Academic research has suggested multiple reasons as to why the night effect exists, with the frequently stated rationale focusing on the timing of information flow, risk management practices, and liquidity premiums arising from differences in the trading volumes between the day and night session, according to NightShares.
Despite the upsides of investing only in the night, concerns around liquidity and transaction costs are primary reasons why some investors choose to own the day instead
It has been noted by capital markets researchers that the transaction costs associated with capturing the night effect could potentially outweigh the outperformance and value delivered by the night effect.
While a broad index strategy that buys all the securities at their respective weights every night and sells them every morning could lead to a high level of transaction costs, there are a variety of financial instruments that can be used to implement strategies, including equity index futures and/or swaps, according to NightShares.
Compared to trading individual stocks, liquid equity index futures allow for large and small-cap exposure as well as reduce costs.
Swaps contracts, created with well-capitalized investment banks, allow investors to create a range of return streams that align with the end investors’ return objectives, according to NightShares. Combined with institutional trading approaches, such as algorithmic trading, portfolio managers looking to capture the night effect can use a range of financial instruments to efficiently gain exposure to the overnight portion of the market.
The NightShares 500 1x/1.5x ETF (NSPL ) is a solution for investors looking to explore the value of the night effect by tilting into the night, without foregoing exposure to the day. NSPL is designed to provide 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.
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