Bruce Lavine of NightShares explains what the NightEffect is and how to access it through ETFs on ETF TV

Presented by Syntax Advisors.

Margareta Hricova: Welcome to ETF TV – your insight into the world of exchange traded funds, issuers and investments. I am Margareta Hricova and joining me today is Bruce Lavine, CEO of NightShares and Deborah Fuhr.

Welcome, Bruce and Debbie.

Bruce Lavine: Thanks for having me.

Deborah Fuhr: Thank you.

Margareta Hricova: So, Bruce, can you briefly share your experience in the ETF industry and how you landed in your current role?

Bruce Lavine: Yeah, I go pretty far back to the early days of iShares and I ran product development in the early years from 2000 to 2003, so I ended up launching of some of the largest ETFs out there, EFA, EM, DVY, the initial bond ETFs, etc..

First, I went to Europe for iShares and then I moved over to WisdomTree in 2006 and was involved there for almost 15 years as the president chief operating officer and a board member. And then lately I was working for this hedge fund called AlphaTrAI, and they had some really interesting signals related to the overnight markets that they were using in their hedge fund. And I thought that would make a fantastic ETF, so we created a new company at the end of last year. We just launched our first ETFs last week.

Deborah Fuhr: Can you describe why there is that performance in the overnight market as compared to during the trading hours?

Bruce Lavine: So it’s a really interesting phenomenon. Really, there’s sort of three reasons. One is that there’s a lot of information flow that happens when the markets are closed, so earnings announcements fx. M&A activity is announced while markets are closed, so you have to be invested to catch that.

Second is, there seems to be this real structural kind of de-risking that takes place among institutions at night. It may be something as simple as wanting the traders to go home flat because everyone fears the overnight session. There’s this concept that one of the professors who wrote about it, called it ‘The Illusion of Control’, that if the markets are open, I can do something about it. If they’re closed, we just sit there with no control.

And the last one is also kind of structural that if you hold overnight, you get capital charges, interest expense, capital marks to market, things that investors sometimes like to avoid by going flat at the end of the day.

Margareta Hricova: And does this phenomena work during all market cycles?

Bruce Lavine: It’s been a really persistent phenomena across many, many years around the world in equity markets. We’ve seen it work in up markets and down markets. We’ve seen it not work in some of those as well. And again, the studies on this have come from professors from around the world. So there seems to be a lot of substance to it.

Margareta Hricova: And how do you tune your ETFs that you have listed to provide exposure to this phenomena?

Bruce Lavine: So these would be the first ETFs of their type that are invested only in the overnight session, but not during the daytime session. We achieve that by holding Treasuries and cash in the fund, and then we use the futures market to get our overnight exposure and then exit those positions first thing in the morning. What we found in the research is that the volatility is substantially lower in the night session than if you are buy-and-hold, because the day session seems to be the problem child where you have a lot of volatility, noise and poor returns. So we kind of think of everything on a risk adjusted basis.

Over time on large cap, we’re getting sort of 60 to 70, sometimes 80% of the return of buy-and-hold coming just from the overnight session and then doing it with substantially less risk.

In the case of small caps, what we found was, shockingly that Russell II, over 100% of the return of the index is coming in the night session before any transaction costs.

Deborah Fuhr: What type of investors are you targeting and how do you expect them to use the ETFs?

Bruce Lavine: There are investors of all types who would benefit from something that has better risk adjusted returns. So if you’re buy-and-hold, it might allow you to expand your overall exposure to equities because your volatility in total, your risk budget, let’s say, is unchanged if you’re using lower volatility vehicles.

Some people have said, fx this would compare real well to a long-short hedge fund. And then, of course, there’s the trading community who we think will ultimately find this really interesting. And we think there will be this sort of new way to talk about the markets, about what did they do overnight? What did they do during the day? And have an access vehicle for that, so we’ll see.

Deborah Fuhr: Do you plan to launch additional ETFs?

Bruce Lavine: Yeah, absolutely. We are big believers in this concept and have some filings that we’ve already made. As an example we think it’s a really interesting idea to leverage just the night sessions, so we file for some products that are 100% in the day, but then 150% at night. Another interesting one is long only at night, but then during the day it’ll turn into a covered call product. And we are looking at overseas markets as well for some future product development.

Margareta Hricova: That’s great. And lastly, can you share your outlook for the ETF industry in the second half of 2022?

Bruce Lavine: You know the ETF industry continues to be incredibly strong in terms of investor preference, so it’s just really a matter of what the markets will do. It seems like it’s going to be a bit of a rough patch for a while still, but they’ll continue to be the vehicle preference. And as soon as we get back into more traditional times, you probably will see record flows probably in the future years.

Deborah Fuhr: That’s great. Thank you for joining us.

Bruce Lavine: Thank you so much.

Margareta Hricova: Debbie, can you share with us some of the other news in the ETF industry?

Deborah Fuhr: Last week we saw 40 new listings and 35 new cross-listings.

When we look at the data through the end of June, we’ve seen 746 new listings in the markets, 990 new cross-listings. There have been 149 closures and 101 de-listed.

It’s been a challenging month in June. US equities posted their worst first half performance since 1970, so this is going to have a significant impact on the performance of assets invested already in ETFs. It doesn’t mean we’ll see net outflows. What it does mean is existing assets will go down. The S&P 500 was down 20% in June. We also saw that Europe was down. Most of the markets were down. The only sector in the US that was up was energy.

The types of products that are coming to market mostly has been active ETFs. A lot of products in Korea and in Asia this past week. And we’ve seen, of course, more ESG and thematic products coming to market. Next week, we’ll be able to give the update on what we’ve seen in terms of net flows, which I do think will be positive, but assets will be down.

Margareta Hricova: Thanks for the update, Debbie, and thank you to Bruce for joining us and to our sponsors, Syntax Advisors, and of course to all of you for watching.

To watch prior episodes and to see news from the ETF industry, visit us at ETFTV.NET.

Thank you.

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Published on July 8, 2022