Overweight Exposure to Night Sessions Bridges the Return Gap

Referred to as the behavior gap, investor gap, or return gap, investor returns often lag investment returns. The gap is often caused by investor behavior, as investors try to time the market or sell at inopportune times, unable to stomach the volatility any longer. High-volatility investments have historically experienced wider gaps between investor and investment returns.

Tilting a portfolio’s U.S. equity allocation towards the overnight portion of the market may be one way to help bridge the return gap between investor and investment performance. The historically lower volatility of the overnight session may lead to better up/down capture ratios, allowing investors to maintain their target equity exposure more comfortably through periods of market turbulence.

The NightShares 500 1x/1.5x ETF (NSPL B) captures the night effect in an efficient and cost-effective way. NSPL seeks to deliver 1x (100% correspondence) to the S&P 500 during the day, providing familiar U.S. large cap exposure.

The fund is unique, however, as it aims to reduce volatility and enhance returns by overweighting the overnight session. NSPL seeks to capture 1.5x leveraged exposure to overnight trading session, or 150% of overnight portfolio performance, for a single day — defined by the time between each NAV calculation.

See more: How to Use NightShares ETFs in Portfolios

Large cap performance last year highlighted the power of the night effect in boosting risk-adjusted returns. Last year, if an investor were to buy the SPDR S&P 500 ETF Trust (SPY A-) at close and sell the open every trading day, they would have lost 13.34%, outperforming buy and hold by nearly 5%.

SPY’s Sharpe ratio is 0.54 for holding the fund for the past 20 years (2003 through 2022). Meanwhile, during the same period, the night session Sharpe ratio is 0.62, while the day session Sharpe ratio is just 0.16.

For more news, information, and analysis, visit the Night Effect Channel.