Two ETFs that seek to capture the “Night Effect” in US large and small-cap equities are shutting down as overnight trading strategies have significantly underperformed their daytime counterparts over the past year.

Overnight trading strategies have significantly underperformed their daytime counterparts over the past year.

The NightShares 500 ETF (NPSY US) and NightShares 2000 ETF (NIWM US) had their last day of trading on 31 July and are due to be liquidated and the funds’ proceeds returned to investors on 10 August.

The Night Effect refers to how overnight markets have historically outperformed daytime trading sessions on a risk-adjusted basis, exhibiting higher returns alongside similar or even lower levels of volatility.

The phenomenon, which has been confirmed through academic research, is believed to be caused in part by the greater frequency of corporate announcements, such as earnings results, that are reported outside of traditional trading hours.

Additionally, overnight markets may also benefit by avoiding a greater proportion of severe downturns which tend to happen more often during normal trading hours, potentially because scores of day traders may amplify these events.

NPSY and NIWM were designed to capture the Night Effect in US large and small-cap equities, respectively, by systematically buying overnight futures positions in the S&P 500 and Russell 2000 indices at the close of each trading day and exiting those futures positions at the beginning of the next trading day.

The strategy has performed dismally over the past year, however, with NPSY and NIWM losing 4.72% and 7.61%, respectively, since their inception on 28 June 2022 (data as of 1 August 2023). The losses stand in stark contrast to gains of 21.8% and 16.6% for the daytime returns of the S&P 500 and Russell 2000, respectively.