The Night Effect

[Overnight]

From the brochure:

"Certainly a broad index oriented 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 that would negate the value of the Night Effect."

It's not a single transaction cost.

This is just Rickshaw's underhanded way of promoting his "buy the index futures at cash close, sell at open" propaganda. It works great in a positive uptrending market, but terrible in a downtrending market, like all of 2022. Don't believe the hype.

 

[DaveV]

i looked at their affiliated website nightetfs.com and they have 3 ETFs - NSPY, NIWM and NSPl. Then I looked at each of the ETF's underlying component. For all 3 ETFs all they have are a single futures contract, and handful of cash equivalents.

 

[BlueWaterSailor]

This is just Rickshaw's underhanded way of promoting his "buy the index futures at cash close, sell at open" propaganda. It works great in a positive uptrending market, but terrible in a downtrending market, like all of 2022. Don't believe the hype.

It worked great at some point? Color me surprised.

 

[Specterx]

Okay, so for the sake of argument, let's say you pay $1 on 100 shares of SPY. There are 252 trading days in a year. You buy at the close and sell the following morning. That's 252 * 2 * 1 = 504 in commissions. You also have the bid/ask. For the sake of argument, let' say you cross half the time on a spread of a penny. That's 252 * 100 shares * 0.01 = 252. So, you pay 252 + 504 = 756 on 37,500. That's a 2% drag.

So, you'll pay 2% so that, with SPY at least, you would have earned ~9.8%-2% = 7.8% on 11% vol instead of ~12.1% on 16.5% vol. Is it worth it? You earn 4.3% less to save 5.5% on vol. Depends on you, I guess. If you just want to use sharpe as a proxy, the answer is no: 0.73 vs 0.71. That's a lot of work to earn a lower sharpe.

You might point to IWM where you would actually have made more on this strategy by avoiding the day losses. Meh, maybe. Look at the other research on all the other markets first. Last time I looked (~10 years ago) it didn't look good. There's a reason nobody has eaten away this 'free lunch' after all these years... it's rotten.

Yes, maybe they can cut down on those costs with swaps etc. I'm not sure it'll be worth it. I do think, however, they'll garner a lot of interest with the right marketing. That's why I'll be interested to watch the prospects of the company, but I won't be buying the ETF.

On top of that you are (in the US) paying short-term CG rates on your winnings. Doesn't really seem worthwhile.

 

[TrAndy2022]

They say they also use swaps, but who is on the other side of those swaps then ? They also had to do transaction to hedge their swaps. So the only viable tradable option to replicate the night effect is trading the futures which is also the most cost effective solution. And the market on close volume for futures is very limited except S&P Futures. But here (on SP500 Futures) you also cannot trade more than 40000 contracts or ca. $8 billion in value (for this overnight effect). Funny is also that they could not explain it better why the overnight anomaly exists.? I would expect more and better explanations here.

 

[Nobert]

i looked at their affiliated website nightetfs.com and they have 3 ETFs - NSPY, NIWM and NSPl. Then I looked at each of the ETF's underlying component. For all 3 ETFs all they have are a single futures contract, and handful of cash equivalents.

Em epic ,ETF's' made out of futures.

Yup.

 

[FreeGoldRush]

On any week without a holiday normal trading hours are only 19.34% of the week. Stock investors are simply checking infrequently to see what the value of their assets are. The people working hard to propel the growth in asset values work on a much wider range of hours. So it would be weird if half or more of the growth in asset values happened during 19.34% of the week. It's interesting how whatever domain people are working in they tend to think the universe should revolve around their own domain.

 

[Rickshaw Man]

This is a well known effect. The problem in trading it is the transaction costs. Those charts aren't including them.

NightShares is well aware of this and they claim to be able to sufficiently minimize the transaction costs using swaps etc.

It would be interesting to follow this and see how their returns (after all expenses) compare to vanilla buy and hold. No real track record yet. In addition to *their* transaction costs to run it (which you'll feel with a drag on the ETF price), there's also a 0.55% expense ratio.

I'm not interested in buying the ETFs, but I am interested in whether the company has any success.

Use stock index futures, micro or mini.

 

[Rickshaw Man]

They say they also use swaps, but who is on the other side of those swaps then ? They also had to do transaction to hedge their swaps. So the only viable tradable option to replicate the night effect is trading the futures which is also the most cost effective solution. And the market on close volume for futures is very limited except S&P Futures. But here (on SP500 Futures) you also cannot trade more than 40000 contracts or ca. $8 billion in value (for this overnight effect). Funny is also that they could not explain it better why the overnight anomaly exists.? I would expect more and better explanations here.

It's the cheapest most cost-effective way to lift the markets. Gap up on open equals free markup for exchange floor specialists. Can you imagine the amount of capital required to open each day exactly where it left off. The financial media always points to the stock indexes. The indexes are the benchmarks.

 

[Rickshaw Man]

Look at the magic futures go....up up up we go.