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.
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.
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