Two actively-managed ETFs taking advantage of the ‘night effect’ in US large and small-cap equities have closed just over a year since launching.
The US-listed NightShares 500 ETF (NSPY) and the NightShares 2000 ETF (NIWM) – which aim to capture the phenomenon where some stocks perform better during overnight trading – ceased trading on 31 July with redemptions taking place on 10 August.
NSPY and NIWM have returned -4.6% and -4.7%, respectively, since they launched in June last year while the S&P has returned double digits during that period.
The ETFs work by buying overnight future positions in the S&P 500 and the Russell 2000 indices at market close everyday, and selling them at the open of the next trading day.
The theory of the ‘night effect’ is based on a piece of academic research that suggests equities perform better overnight.
This was attributed to the ability to trade equities around the clock, a spike in returns when European investors hit their desks and earnings reports published outside of trading hours.
However, the closure of the ‘night effect’ ETFs highlights just how difficult it is to create products based on strong academic research, in this case, turning a market anomaly into actual returns.
ETF ventures into obscure parts of the market have become more frequent given the over-competitiveness of the plain vanilla market, with issuers forced to create more complicated strategies that command higher fees.
Joachim Klement, investment strategist at Liberum Capital, said at the time of launch: “The problem with so many of these approaches is that they do not deliver in real life what academic studies promise.
“The problem is that plain vanilla products do not command particularly high fees. So, the financial industry is constantly looking for an ‘edge’ to justify paying higher fees.”
While the research found the night-time returns of the S&P 500 looked strong, the same test run for the UK and European markets show returns are roughly the same or lower as the daytime.
“One of the key things you can do to improve your performance is to test the same methodology for other markets that have different dynamics and different performance histories,” Klement said.
“The night-time returns for the European and UK markets are not only quite a bit lower but also roughly the same as the daytime returns, which means we have a research puzzle on our hands.”
