ETF strategy designed for night owls gets a wake-up call

NightShares shutters two ETFs that only invest when the market is closed.

The lights are going out at two unique ETFs from AlphaTrAI Funds that offered investors indexed market exposure only after the markets closed for the day by sitting on the sidelines during regular trading hours.

The strategies were launched a year ago promoting back-tested data showing how much more efficiently and steadily investments can perform when the noise of news and nervous retail investors is taken out of the equation. Unfortunately, financial advisors, representing the biggest potential market for ETFs, didn’t bite.

As a result, the $3.7 million NightShares 500 ETF (NSPY), which tracks the S&P 500 Index, and the $1.4 million NightShares 2000 ETF (NIWM), tracking the Russell 2000 Index, will cease trading at month’s end and liquidate entirely on Aug. 10.

“We’re big believers in the night effect but there are better executions,” said Bruce Lavine, chief executive of the fledgling ETF business, which is not completely giving up on the strategy.

Referencing the relative success of the $15 million NightShares 500 1x/1.5x ETF (NSPL), which maintains the normal daytime exposure and leverages the after-hours exposure, Lavine suggested investors and advisors weren’t comfortable sitting it out when the markets were open.

It hasn’t helped that the regular daytime performance for the broad equity markets has been strong this year.

Since the start of the year, NSPY is down 1.7% while the benchmark S&P 500 is up 19.9%. NIWM is down 4.3% while the benchmark Russell 2000 is up 13.4%.

NSPL, meanwhile, is doing a better job of proving the strategy can work with a gain this year of 17.4%.

“The daytime has been good lately, and advisors are finding the products that sit out the day completely to be too much for them in terms of diverging from the benchmark,” Lavine said.

Backing up his faith in the strategy, Lavine’s ETF complex has filed with the Securities and Exchange Commission to launch a NightShares Select ETF that will hold single stocks and ETFs “designed to capture the night effect and will also have the daytime exposure,” Lavine said. “It’s a quantitative and systematic way of capturing the night effect with an artificial intelligence overlay that will help us with stock selection, weighting and optimizing the whole trading process.”

If it’s approved by the SEC, the new actively managed ETF will charge 65 basis points, and likely launch in mid-September.

Todd Rosenbluth, director of research at VettaFi, said the strength of the markets has hampered the night effect, which is illustrated by the relative strength of NSPL, which tilts into the night while also including the daytime market exposure.

“Investors have been rewarded more recently when combining the after-hours market with traditional trading hours than just investing during the period when the stock market is closed,” Rosenbluth said. “Asset managers routinely will pivot their product lineup to meet advisors and end clients where they are.”

That’s essentially how Lavine explained it.

“We’re kind of like a factor tilt, and being 100% at night is extreme,” he said. “We’ve gotten pretty good reception for NSPL from advisors. We’re making a pivot, not abandoning the space.”