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Sleep can make you wealthier. That’s because of the stock market’s historical tendency to make most of its daily move overnight, between the closing and opening bell.
To illustrate how this night-vs.-day pattern works, consider the U.S. stock market’s performance on a recent Tuesday in March. Most of that day’s gain came between the market close on Monday and the Tuesday open.
The table below shows the returns for large-cap and small-cap stocks. Though the big move in the right-most column were what the headlines reported, the actual returns during Tuesday’s session were far less impressive.
| Index | Return from market close to following day’s open | Return during the regular daytime session | Return from previous day’s close to following day’s close |
| SPDR S&P 500 ETF | 1.33% | 0.31% | 1.65% |
| iShares Russell 2000 ETF | 3.05% | -1.13% | 1.89% |
Not all trading sessions exhibit this pattern, of course. But on average they have done so in the past, according to Bruce Lavine, founder of NightShares, a firm that has created ETFs to exploit this night-versus-day pattern.
In an interview, Lavine said that over the 20 years through the end of 2022, the SPDR S&P 500 ETF
SPY,
produced a buy-and-hold return of 9.7% annualized. Three-quarters of that return — 7.5% — was produced while the NYSE was closed.
This pattern was even more pronounced in the case of the Russell 2000 Index
RUT,
according to Lavine. Over the same 20-year period, all of the index’s net return was produced overnight; during the day session, it actually lost ground, on balance.
A growing body of academic research has confirmed the existence of this night-and-day pattern. One study, to which I devoted a column two years ago, entitled “Market Return Around the Clock: A Puzzle,” was conducted by Oleg Bondarenko of the University of Illinois at Chicago and Dmitriy Muravyev of Michigan State University. The study subsequently was published in the Journal of Financial and Quantitative Analysis.
In a recent interview, Muravyev said that he is not aware of any subsequent research that calls into question their finding that the bulk of the stock market’s net returns occur during the overnight hours.
Another study, reaching similar results, entitled “Asset Pricing: A tale of night and day,” was recently published in the Journal of Financial Economics. It was conducted by Terrence Hendershott and Dmitry Livdan of the University of California, Berkeley, and Dominik Rösch of the State University of New York at Buffalo. They found that, on average, higher-risk stocks outperform lower-risk stocks, as theory says they should — but only in the overnight hours. During the day session, in contrast, lower-risk stocks on average outperform higher-risk issues.
In an interview, Hendershott reminded us that there is no guarantee this pattern will persist. There’s always the possibility that a pattern will stop working as more and more investors try to profit from it. He does not think we’re close to reaching that point yet in the case of the night-versus-day pattern, however, since the futures markets — what the NightShares ETFs use to exploit the pattern — are quite liquid. Added Hendershott: The limit of what could trade the night-versus-day pattern without causing it to disappear is more than $5 to $10 billion.
There are other benefits of getting your equity exposure at night rather than the day. One is that the nighttime session tends to be much less volatile than the day session. So, on a risk-adjusted basis, investing at night comes out even further ahead of the day session than the raw numbers alone would indicate. Another benefit is that a portfolio which only invests in the stock market at night has a relatively low correlation with an index fund that is invested throughout the day.
The combination of low volatility and low correlation means that, by investing in one of these new NightShares ETFs, you could increase your equity allocation without increasing your portfolio’s overall risk. Since equities have a higher expected long-term return than most other asset classes, that is a real benefit.
Costs and caveats
Is there a catch? Possibly. Transaction costs eat into the theoretical profits that the strategy produces. That’s because the strategy trades into and out of S&P futures every trading day. Even though futures carry extremely low transaction costs, they can still add up — to about 1% annually, Lavine estimated. So when considering the strategy, be sure to adjust the theoretical returns that studies may report by an estimate of transaction costs.
Also, exploiting the night-versus-day pattern is not a short-term trading strategy. The odds of beating the market in any given week-, month-, or even quarter are slightly better than 50-50. To translate those modest short-term odds into a strategy that is likely to beat the market, you need to invest in it consistently over many years. This may be one reason why the approach isn’t more popular.
Evidence that the strategy doesn’t always work is how the NightShares ETFs fared over the six weeks after they were launched in late June 2022.
The ETF that invests in the Russell 2000 when the market is closed — NightShares 2000 ETF
NIWM,
— lost 2.5% from June 28 through Aug. 16, according to FactSet, in contrast to a 16.6% gain for the iShares Russell 2000 ETF
IWM,
for a six-week negative alpha of more than 19 percentage points. .
The ETF that in invests in the S&P 500 when the market is closed — NightShares 500 ETF
NSPY,
— didn’t lag by as much as the Russell 2000 version but still faltered: The tracking ETF lost 1.0% from June 28 through Aug. 16, in contrast to a 12.9% gain for the SPDR S&P 500 ETF Trust
SPY,
for a negative alpha of 13.9 percentage points.
Since mid-August 2022, the NightShares 500 ETF has continued to lag, though by a smaller margin — producing a negative alpha of 3.0 percentage points. The NightShares 2000 ETF has produced a positive alpha since mid-August of 3.9 percentage points.
Lavine says he isn’t surprised by the ETFs’ poor performance over the first six weeks of their existence, since his research has shown that bear-market rallies often are when these nighttime-only vehicles lag a buy-and-hold strategy.
Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com
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