Investing on the graveyard shift: Two new ETFs look to capture the ‘night effect’

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Two ETFs out this summer are working the overnight shift.

The NightShares 500 [NSPY] and NightShares 2000 ETFs [NIWM] are doing something no ETF has done before: Take advantage of the so-called “night effect.”

According to NightShares CEO Bruce Lavine, stocks bought at the market close and sold when markets open again in the morning often outperform based on research going back about 14 years.

“In the case of small-caps, over many, many years the daytime return is negative on the Russell 2000 [.RUT],” Lavine told CNBC’s “ETF Edge” on Monday. “We have two funds, large-cap [NSPY] and small-cap [NIWM], that are trying to… capture this effect for investors.”

Lavine’s after-hours strategy places an emphasis large- and small-cap stocks. For expample, his firm’s NightShares 2000 ETF, for example, is designed to track the Russell 2000 in the wee hours.

He cites news flow as a key factor behind the “night effect.” It’s a time, he contends, when investors often feel the need to catch up with the effects of earnings, mergers and acquisitions.

Risk aversion at financial institutions also plays a big part in Lavine’s bullishness on the overnights.

‘They leave something on the table’

“People have this sort of desire to go home flat sometimes so they can sleep at night,” Lavine said. “They leave something on the table for the other investors.”

Lavine expects the “night effect” and its related behavioral phenomena sticking around.

“Statistically, bear markets happen during the day session,” Lavine said. “It’s much more frequent.” 

So far, the ETFs are underperforming the Russell 2000 and Dow since their inception on June 28.

The NightShares 500 and NightShares 2000 ETFs are down 5.7% and 6.9%, respectively. Meanwhile, the Russell 2000 is off 3.6% and the Dow is off 2.6%.

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