People have long imagined ways to make money while they slept.Â Happily, it’s not a pursuit I’m particularly bothered by, but as I develop trading strategies, I do make note of different market behaviors that correlate to the time of day. Or night.
In particular, I’ve been looking at various market-breadth ETFs recently as possible fodder for the little dynamic hedger I’ve described before, and I’ve noticed an interesting behavior among several of them…
Like the majority of traders, they do better when they’re not trading!
That is, they actually display better performance at night than they do during the regular trading day; there’s more profit to be had in their gaps between sessions than there is during trading sessions. Below I quantify this observation more thoroughly…
I looked at the performance of a variety of ETFs across three super-simple “strategies”. The first of them trades overnight – buying the close and selling the following morning’s open. The next buys at the open and sells at the close. And the final one is, essentially, buy and hold though it’s implemented as a buy at close, sell and buy at following close. No costs or slippage are included.Â The table below details the results for the SPY (S&P 500), IWM (Russell 2000) and QQQQ (Nasdaq 100).
In all cases, the ETFs perform better overnight – they make more and have almost precisely half the risk, yielding very substantially better risk-adjusted performance measures (here sharpe is calculated with a constant 5% risk-free rate). These cases are highlighted in yellow in the table. Likewise, the worst performer in all cases was the “day-trader” who bought on the open and sold on the close. One thing to note about the below summary is that all data is taken from inception for each of the ETFs, so their duration varies! (For the SPY, since 1/29/1993; for the IWM, since 5/26/200 and for the QQQQ since 3/10/1999).
I tried the same analysis across a few other ETFs to see if the effect was a global one or a US-specific phenomenon. The results are mixed but likely negative for Europe (EWG), Japan (EWJ) and broad foreign markets (EFA). I’m not going to summarize that data here, but you can grab the excel workbook I used for this exercise here, though I warn you in advance that it’s about 2.3M. (If you find errors – please point them out!)
[UPDATE: .XLS 97-2003 version available here is ~3M]
For the US markets summarized in the table, the conclusion is pretty explicit – the great majority of the market’s profits are attained overnight. Even worse: in spite of the positive returns across all of these markets over the relevant periods, all of them show significantly negative intraday performance.
For long-only day-traders, this is the kind of result that should cause nightmares!