New ETFs aim to capture overnight equity returns in stock market

The overnight phenomenon has been an obsession among traders who have noticed that those hours tend to deliver better returns than just owning stocks during the span when the US market is open.

equity returns, stock market, ETF, NightShares, US market, traders
The ETFs will use futures and total return swaps to capture the difference in returns notched during US market hours and those after regular daytime trading ends.

Bloomberg: A pair of exchange-traded funds that seek to capitalize on the tendency for US stocks to log the bulk of their gains when the cash market is shut are set to launch Tuesday.

The NightShares 500 ETF (ticker NSPY) and the NightShares 2000 (NIWM), the debut products of AlphaTrAI Funds, will use futures and total return swaps to capture the difference in returns notched during US market hours and those after regular daytime trading ends.

In other words, owning these large and small-cap-focused funds essentially gives investors the ability to buy stocks at the close and offload them at the next day’s open. Each ETF carries a 0.55% management fee.

“Your risk-adjusted return improves a lot when you isolate the night portion,” Max Gokhman, chief investment officer for AlphaTrAI Funds, which is based in the San Francisco area, said in an interview. “So this leads to some really clear use-cases for why someone would buy this product.”

The overnight phenomenon has been an obsession among traders who have noticed that those hours tend to deliver better returns than just owning stocks during the span when the US market is open.

To be sure, the effect isn’t always prevalent, and there are stretches when the opposite can be true. But it has been pronounced in recent months and has been evident in the cryptocurrency market as well.

For instance, the S&P 500 Index has lost roughly 18% this year, though the night effect shows it losing 10%, according to AlphaTrAI. Buying and holding the Russell 2000 overnight translates to losses of 7% versus its 9:30 a.m.-4 p.m. decline of 21% year to date.

Theories abound as to why there’s a difference, including that news continues to flow even after stock trading ceases for the US day. Gokhman also says many companies tend to post earnings results while markets are closed, which tends to swing prices.

“Earnings announcements tend to be a positive overnight effect,” he said. “That answers part of the return story.”

Staying Power

Policy developments also occur while US traders are sleeping. These, and other explanations, are all structural in nature, he added, meaning that the phenomenon has staying power.

Gokhman cited several potential uses for his firm’s products. For one, they allow traders to increase equity exposure. They could also be a trading tool for those — especially retail investors operating from their homes or phones — who want to transact in the market overnight in addition to buying and selling stocks during the day. And investors looking to speculate around a specific announcement could use the funds to do so.

“With yields continuing to rise to new heights, bonds are failing investors seeking safety and diversification,” Gokhman said. “Conversely, adding exposure to the overnight effect gives equity exposure, but only to the better-behaved after-hours portion of stock markets. This may let investors sleep a bit more soundly through the turbulent times we’re going through.”

Get live Share Market updates and latest India News and business news on Financial Express. Download Financial Express App for latest business news.

Most Read In Featured Stories
Photos