NightSh ETFs are taking a hit

Two new exchange-traded funds that are trying to capitalize on overnight equity gains, or so-called night effect, are taking a hit.

The NightShares 500 ETF ticker NSPY and the smaller-cap NightShares 2000 ETF ticker NIWM have trailed their broader benchmark indexes by over 11 and 13 percentage points since their release on June 28. NSPY tracks the S&P 500 Index, while NIWM tracks the Russell 2000. The ETFs use futures and swaps to allow investors to buy stocks at the market close and sell them at the next trading day's open.

The negative performance differential between the NightShares ETFs and their broader indexes is eye-popping, said Nate Geraci, president of The ETF Store.

On Thursday, the NSPY rose 0.4%, as the S&P 500 fell 0.1%, while the NIWM closed flat and the Russell 2000 fell 0.1%.

Stocks that are bought at market close and sold at market open the next day can deliver better returns than just owning stocks during market hours. Earning announcements and news are often released after the regular trading session and contribute to stock performance, hence the night effect.

Geraci said there is a lot of academic literature showing the night effect, but capturing it in a live trading environment is easier said than done.

When the NightShares ETFs, issued by AlphaTrAI Funds, launched it hoped to take advantage of the phenomenon.

Geraci said that once everyone is aware of a potential source of alpha, a case could be made that it quickly gets arbitraged away. The closure bin of the ETF is littered with products that had spectacular back tests and then saw their faces ripped off in the wild. Geraci said that the funds management fees and transaction costs could be offsetting gains. Each fund has a 0.55% management fee.

The volatility of the current market and stocks unusual performance after earnings results is one of the worries. Some stocks have gone up despite companies missing earnings expectations.

It's been that kind of market where it's certainly not what you would typically observe, said Max Gokhman, chief investment officer at AlphaTrAI Inc., who said that it has been a bad earnings season as it relates to the night effect.

We're going through a bear market rally right now because a lot of the bears have gone into hibernation - we saw a lot of degrossing in June and I think July took advantage of that, Gokhman said. It's where you have these weird effects of stocks posting misses and then going up on relatively low volume. We ll get back to a more two-sided market once that goes away. I think that will result in conditions that are favorable for the night effect. None a Very Dangerous Place to Be Pregnant Is It Even Scarier if You Are Not A Very Dangerous Place To Be Pregnant