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S&P 500: This Investment Tries To Make Money While You Sleep

Warren Buffett once said you’d better find a way to make money while you sleep, or you’ll work until you die. A series of relatively new ETFs aim to do just that — just not in a way Buffett might have imagined.




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Three ETFs including NightShares 500 1x/1.5x ETF (NSPL), NightShares 500 ETF (NSPY) and NightShares 2000 ETF (NIWM), try to make money on lucrative after-hours stock trading. It’s what the funds’ prospectuses call the “night effect.” These ETFs try to cash in on the idea most of the market’s direction is set after regular daily trading on the market exchanges closes.

“The overnight component … has historically comprised the majority of the total return in the 24-hour market cycle,” the fund prospectus says. But is betting on night trading a good idea for most investors?

The Rationale Of Nighttime Investing

After-hours trading is the buying and selling of securities that occurs after the market’s regular hours of 9:30 a.m. and 4 p.m. eastern time. Typically, a bulk of extended-hours trading happens from 4 p.m. to 8 p.m., just after the market closes. But 4 a.m. to 9:30 a.m., right before regular trading starts, is also busy.

Trading after markets close became more popular during the investing craze of the late 1990s and early 2000s. New systems enabled longer market hours. And the rise of high-speed computerized trading increased trading volumes in the wee hours.

Some research suggests after-hours trading captures most of the market’s moves. Research titled “Return Differences Between Trading and Non-trading Hours: Like Night and Day,” published in 2008 by three academics is the proof fans of late and early trading point to.

The paper found after-hours trading activity drove stock price premiums. Additionally, the researchers found “returns during the day are close to zero and sometimes negative.” What’s more, the paper argues this powerful nighttime trading trend applies not just to individual stocks, but also stock index and futures across both the NYSE and Nasdaq.

“Night returns are consistently higher than day returns across days of the week, days of the month, and months of the year. The effect is driven in part by high opening prices which subsequently decline in the first hour of trading,” the paper found.

Choosing An Afterhours Strategy

NightShares help investors capture after-hours trading activity in three ways.

The simplest strategy is the tiny $3.8 million-in-assets NightShares 500. The ETF uses a basket of futures positions to expose your portfolio exclusively to after-hours trading. This ETF, which charges 0.55% annually, doesn’t capture any regular-hours trading activity.

The ETF is new. It launched June 28, 2022. So it’s difficult to evaluate performance. But since inception, the ETF is down 4.1%, lagging the S&P 500’s 2.8% gain. This year so far hasn’t been a convincing testimony, either. Shares of NightShares 500 are up just 2.2%, while the S&P 500 is up 2.4%.

Another approach targets more volatile stocks. NightShares 2000 bets on after-hours trading in small-cap stocks in the Russell 2000 index. But its performance lately is even worse. The ETF is down 3.5% since the June 28, 2022 inception versus a 6.6% gain by the iShares Russell 2000 ETF (IWM).

The last play is the riskiest. NightShares 500 1x/1.5x gives you 100% exposure to regular trading in the S&P 500 during the day. But it amps up after-hours volatility by 1.5 times using leverage. This strategy only dates back to Oct. 4, 2022. But so far this year, it’s up 3.5%, topping the S&P 500’s 2.4% change.

Todd Rosenbluth of VettaFi thinks these strategies can work, but for investors convinced of the after-hours effect.

“For investors that feel really confident in the market movements but want the liquidity and tax efficiency benefits of an ETF, this can make sense,” he said. “These products are positioned to a small audience of active traders and the same risks of holding a leveraged ETF focused on the traditional market hours apply.”

ETFs That Stay Up All Night

NightShares ETFs that target different parts of the after-hours trading market

ETF Symbol Inception YTD % ch. % ch. from inception Expense ratio
NightShares 500 (NSPY) 6/28/2022 2.2% -4.1% 0.55%
NightShares 2000 (NIWM) 6/28/2022 3.3% -3.5% 0.55%
NightShares 500 1x/1.5x (NSPL) 10/6/2022 3.5% 6.8% 0.67%
Sources: S&P Global Market Intelligence, IBD

Follow Matt Krantz on Twitter @mattkrantz

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