Capturing The “Night Effect” With ETFs, With Bruce Lavine

What is the “Night Effect” in the markets, and how can investors take advantage of it?

Bruce Lavine, CEO at NightShares, joins the show to discuss the research behind the Night Effect, and how a new family of ETFs offers investors practical access to this unique alternative strategy.

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Episode Highlights

  • How Bruce got started in the ETF industry, including his work at two of the largest names in the ETF space.
  • The history of the Night Effect in the markets, and how it works.
  • Details on three unique NightShares ETFs that leverage the power of the Night Effect.
  • How advisors should think of the NightShares ETFs, in terms of their place in a diversified portfolio.
  • Why Bruce believes that more mutual funds may convert into ETFs in the coming years.

Today’s Guest: Bruce Lavine, NightShares

Bruce Lavine on The Alternative Investment Podcast

About The Alternative Investment Podcast

The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.

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Show Transcript

Andy: Welcome to “The Alternative Investment Podcast.” I am your host, Andy Hagans, and today, we’re talking about the night effect in the markets and how investors can potentially take advantage of that. And joining me today is Bruce Lavine, who’s CEO and founder of NightShares. Bruce, welcome to the show.

Bruce: Thanks for having me, Andy. Glad to be here.

Andy: Really interesting topic here, and I’m gonna nerd out on it a little bit I think. This is part of our series on liquid alts and alternative ETFs. So, we want to talk about these ETFs and obviously about the night effect. But before we dive into that, Bruce, could you give us a little bit of your personal background and how did you get started in the ETF industry?

Bruce: Yeah, I go pretty far back. I was in a strategic claiming group at Barclays Global back in 1998 when they were looking at getting into this ETF thing and which ultimately became the iShares business. So, I was very deep in the soup early on. I ran product development, I was the CFO. And then in 2003, I went to Europe and I ran the iShares business as it was starting up there for three years. After that, I joined WisdomTree as the president chief operating officer in 2006. And I spent about 15 years there in an operating and a board capacity.

Andy: So, wait, is there any ETF issuer that you haven’t worked for?

Bruce: No. Just…

Andy: Can you name one?

Bruce: Just two of them before this one. Yeah.

Andy: Yeah. Okay. Sure, sure. Go on. Go on.

Bruce: But I will say there was a lot of products that came through those.

Andy: Yeah. And iShares, I mean, they’re one of the top two or three names still to this day, right, with ETFs?

Bruce: Yeah. I mean, it’s hard to imagine some of the size and some of the things that we launched back then, but yeah, no, they’re a behemoth for sure.

Andy: Yeah. It’s strange to think back to those days because now ETFs, they’re just part of the landscape. They’re part of the everyday nuts and bolts of investing. What was it like, like, the first couple years when ETFs were novel? I mean, it’s like hard for me to even imagine. But were RIAs, were advisors, like, nervous about them for the first few years?

Bruce: There were a few, there were a few. I remember we had a focus group with one guy, and we told him that he could shorten the shares, and it was okay, the fund would still grow in size, and he was utterly convinced we had a Ponzi scheme going. So, that was one. You know, but most of it was their business models were set up as commission-based business models. So, they had a switch to be fee-based advisors, and the ETF thing really accelerated that switch.

Andy: So, it wasn’t… Yeah, I mentioned RIAs. It wasn’t so much that RIAs were confused or not into ETFs. It was more that other types of advisors have sort of slowly made that shift to being fiduciaries.

Bruce: Yeah. You know, there were a lot of mutual funds being used with trail commissions being paid, and there was, you know, commissions on individual securities. And I think, you know, the ETF, you know, structure didn’t fit so well into that. We couldn’t and didn’t want to pay retrocessions. So, you know, we went after the fee-based guys, and they ended up being the ones that did better with the clients and performed better. And so, I think most advisors started shifting their model that way. So, I think it was a win-win in the end for the advisor and client, and the ETF sponsor.

Andy: Yeah. I mean, preaching to the choir at AltsDb, at “The Alternative Investment Podcast,” a big part of our audience is the, you know, registered investment advisor, you know, advisors who are fiduciaries. And so, I’m guessing a lot of our audience is familiar with the night effect, but I’m guessing a lot of our audience is not familiar. So, let’s talk about the night effect in the stock market and how it works. And I think it’s important before we dive into any products that we talk about the underlying research because although these ETFs are newer, the night effect in the markets has been researched for decades. So, where did all this start?

Bruce: That’s why I got so excited about it. You know as I said, I launched a lot of products and I’ve seen a lot of things, but I’ve never seen this research. And so, I was working with a group of researchers based down in San Diego at a sister company of ours, and they found this signal organically. And we looked at it over many time periods, we looked at it over many different ETF tickers, we looked at it around the world, and it had this great consistency and persistence to it. And what it was basically saying is that more of your return was coming at night, and more of your volatility was coming during the day.

And so, when you thought about this as a risk-adjusted trade, you know, you wanted to be more into the night and the night was giving you higher Sharpe ratios. And, you know, so that’s why I got excited. It wasn’t until after seeing all that that I went out and looked around a little bit and found about…quickly found 10 or 12 white papers that have been written over the last 25 years about this night effect. And so, it goes pretty far back. Again, it’s been done by professors around the world, and they find this premium from night, from…

And when I say night, it’s buying at the close the day before, selling it the morning today, that’s called the night session. And the day session is I buy at this morning’s open and I sell on today’s close, that’s the day. So, I was fascinated by it. I thought I would make a great addition to the ETF landscape because, you know, the markets have been cut lots of different ways before, but never quite this way. And, you know, when you read the research, you think, yeah, this is sort of like a factor almost or a risk premia, and it’s never had a product against it and, you know, most do. So, that’s how we got here.

Andy: Let’s talk about the risk premia, you know, from a theoretical point of view. Is it a risk premia because the markets are closed, so what I own is a little bit less liquid? I guess conceptually, where does that risk premia come from?

Bruce: Yeah. It’s a really fascinating question and I will say that, you know, there…nobody has the exact answer here. There’s sort of three areas that are sort of given as the most likely reasons. One is an information flow reason. So, when markets are closed is when information flows typically around earnings, and around M&A. M&A is very positive for the markets, earnings is unbalanced positive for the markets. So, you have to be invested to catch that. So, that’s the first one.

Second one is there seems to be a lot of, sort of call it, institutional de-risking that takes place almost at a structural level, you know, throughout, or by the end of the day let’s say. Many institutions don’t want to go home with excess inventory and excess risk on their books. They sometimes just play during the day like a market maker and an ETF, for example, but their business is not to hold long positions. So, we see this sort of de-risking happening at night.

And also, you know, if you hold overnight, you have interest charges, you have capital charges, your positions get marked, your leverage ratios get shown to the world and, you know, maybe intraday you’re 30 to 1, and then they bring it back into line at 10 to 1, the compliance requirement, that kind of thing. The final component is really an investor behavior component. And this one’s probably the most fascinating.

And I talked to one of the professors who wrote one of the papers, and he said basically that markets react to macro news at night and during the day. And we’ve seen that repeatedly, right? So, when Russia invaded Ukraine, the markets tumbled overnight. When we get, you know, the Feds speaking in the middle of the day, they react during the day. But only the investor behavior component really happens during the day. And that’s this idea of, you know, investors influencing each other, day traders, algorithmic trading, you know, all these things that can lead to volatility that’s really not going on at night.

Andy: Okay. Yeah, that makes sense. So, one other kind of background question, I suppose. So, you know, on the traditional side of my portfolio, I’ve always been, you know, mutual funds, index funds, exchange-traded funds. I don’t know that I’ve ever executed that type of transaction at night. I’m sure I’ve, you know, signed a business contract or private equity deal or something after the close of business but thinking about traditional. So, how does an…how would an individual investor be trading at night? Like, practically speaking, are the transaction costs higher at night when you’re buying and selling securities at night?

Bruce: So, what we’re actually doing is we’re not transacting during the night. It’s a buy-and-hold overnight strategy essentially. We’re buying in late in the day, you know, very close to 4 p.m. Eastern, and we’re selling next morning at 9:30. So, it’s really we’re not trying to…we’re not worried about thin markets or liquidity markets. In fact, in some cases, maybe that’s what’s causing some of the night effect, right? You don’t have these players in there and the natural tendency of the markets maybe to go up.

Andy: So, you’re actually then the buy order is before the markets close, the sell order is after they open. So, those actually…you could play the night effect by not transacting after the markets are closed, by actually transacting when they’re open with just a couple minute buffer sort of thing.

Bruce: Yeah, exactly. Exactly.

Andy: Okay.

Bruce: That’s what we’re doing in our funds.

Andy: Okay. Yeah, that makes sense. Now, to your knowledge, I guess I should say, are there any hedge funds or, you know, private traders, private money? Is there anyone aside from your ETF? Was there anyone already doing this?

Bruce: Yeah, that’s a great question. So, you know, it was interesting as I talked to people, there was sort of this, yeah, I’ve read something about this kind of feedback I got from, not from everybody, but from some, you know, real sort of sophisticated traders. I have definitely heard of at least a couple of hedge funds doing this. I think the difference is, you know, we do the same systematic trade every single day, and I think, you know, hedge funds maybe tend to put the trade on at certain times but not others.

You know, there’s this great question about when does the night effect work best? And, you know, we’re constantly trying to figure out ourselves. But, you know, it moves around a little bit, right? So, we like to say it doesn’t win all the time, it wins over time. And so, you have to stay in the trade. But it’s not immediately apparent, you know, one day to the next what’s gonna happen.

Andy: Are there issues with transacting as soon as the market opens? I mean, from what I understand, that can be a problematic time to do any sort of trade.

Bruce: Yeah. Right now we’re doing it in relatively small size and we’re not finding any issues. We’re using futures contracts, you know, on essentially the S&P 500 and the Russell 2000s and they are highly liquid. That was part of the product design. I should mention the night effect works, you know, works actually dramatically well on other parts of the market, but we weren’t sure we could scale it. To give you an example, cannabis stocks had a strong night effect. I’m not sure about 2020, but when we look in 2021, they had a very strong cannabis stocks…night effect in cannabis stocks. But, you know, we just didn’t think we had the capacity to have a meaningful size fund.

Andy: Got it. Okay. So, now your company NightShares, there are three different ETFs. And I’d like to discuss each of these ETFs individually, at least briefly. So, let’s start with NSPY. So, this is the NightShares 500 ETF, and I have a quote here. “Seeks to return the night performance of a portfolio of 500 large-cap U.S. companies.” So, this is an alternative strategy, obviously, this is “The Alternative Investment Podcast.” So, this is an alternative strategy, but large-cap U.S. stocks, that’s about as traditional of an asset class as you can get. But I’m wondering, you know, 500 large-caps, are these the same thing as the S&P 500, or is this a slightly different index?

Bruce: Yeah, it is. In NSPY you could almost think of as the night spider, right? It’s the night portion of SPY.

Andy: Okay.

Bruce: So, we’re doing it by the fund holds essentially a collateral…excuse me, a collateral pool of cash and treasuries. We go out, you know, maybe six months on the treasuries or something like that. And then at night, we buy the futures on the S&P 500, which is, you know, one of the most liquid markets in the world and then we sell them the next morning. And so, you have that overnight exposure to the S&P essentially.

Andy: And so, this… Well, let me ask. This NightShares 500 ETF, would this be, like, the most liquid, the most scalable way to implement a strategy based on the night effect?

Bruce: That was our thinking, yeah. That, you know, using a broad index with high liquidity, we are very conscious of trying to minimize those transaction costs you mentioned. And, you know, you can trade S&P futures quite inexpensively. And so, that was a big part of the implementation. You know, the whole thing about the night effect that’s been raised in many of these papers are it exists, but can you capture it? You know? So, that’s, you know, the engineering matters about how you try to capture it. Okay.

Andy: Yeah. Not only…I would be thinking not only can you capture it, but then does the cost of capturing exceed the benefits? So, you know, as you mentioned, you can inexpensively trade, you know, to engineer this product, how to inexpensive cost structure. Are there other…you know, and I know we’re gonna talk about the other two ETFs, but are there other markets where you might, you know, think about capturing the night effect, but where it’s cost prohibitive right now due to structural reasons?

Bruce: Well, yeah. Again, we’ve looked at, like, every ETF under the sun sort of night and day. I think it’s fascinating to watch it because some of them have very pronounced daytime and nighttime effects. But we found a lot of them were tricky to trade, so we didn’t get involved in anything that international securities yet or, you know, as an example, we originally filed for the Midcaps, the Russell Midcaps but we decided against launching it because we needed that liquid future to launch it. So, with the Russell 2, we have quite a liquid future. So, it’s definitely affected, you know, our product design and our…what we’ve brought to market.

Andy: Understood. And so, there’s three ETFs in the U.S. market, U.S. exchanges. Have you thought about maybe in future years expanding internationally? Are there any other…are there any foreign markets? Are there any foreign exchanges that are liquid enough to pull this off?

Bruce: Well, yeah. What’s fascinating about the night effect is if you were, let’s say, a German investor and you bought the DAX close and sold the DAX open, you have a similar history to what we see in the U.S., which is these improved Sharpe ratios, more of your return coming at night, a Nikkei 225 investor sitting in Tokyo. But it’s sort of a local phenomenon that we see in the local market. So, which is why we think it’s quite structural that it exists around the world like this. So, yeah, you know, it required launching local product in local markets.

Andy: And have you thought about doing that at your firm?

Bruce: We have. We have. Yeah. We’re just trying to, you know, advance the ball in our company a little bit more.

Andy: Yeah. No, I get that. As an entrepreneur, you know, one thing at a time. But so when you mention that it’s local but it’s a global effect, just to kind of spell it out for me on a technical…in a technical way, that means that it’s not that there’s one night worldwide where there’s a night effect, it’s that each individual market has a night effect based on its local night?

Bruce: Yeah, exactly. And so, you know, going back to sort of why does it happen, right, you have these… You know, most markets are in this cycle, this once-a-day cycle where the funds get priced at the end of the day NAV, the exchanges shut down, people, you know, mark their books. And that seems to happen across the globe. Well, obviously that happens across the globe, and that seems to be a big part of the night effects, you know, the various behaviors that, you know, come from that. So, again, that’s why we think it’s, you know, quite a structural thing going on.

Andy: Got it. Okay. So, I’m curious in the research, you know, you mentioned that it doesn’t work all the time, but it does work over time. So, are there any data points on like, you know, how many nights a year outperform the day, or…? You know, like, I guess…

Bruce: Yeah.

Andy: I’m trying to think about, like, I’m in a…playing blackjack or something, and, you know, if I win 52% of the time, I’m doing great, right? Like, that’s awesome over time.

Bruce: Right. Right.

Andy: So, you know, could you…? Is there any way you can quantify that for me?

Bruce: Yeah, there is. I don’t have the stats in my head right now, but that blackjack analogy is a good one, right, because it is something akin to that where we are winning sort of 50%, I feel like it’s 53%, 54% of the time.

Andy: Okay.

Bruce: Another way to think about it is the day session is sort of the problem child, let’s say. So, S&P for example, buy and hold has, like, a 0.6 Sharpe ratio, and the night had maybe a 0.65 or a 0.68, it was a little bit higher, but the day had a 0.24 Sharpe ratio. So, a very poorly rewarded session is the day. And so, by avoiding it, that’s, you know, how we do better.

But what actually happens in the day is you have more tail events in both directions, right? You have more big up days and more big down days than the night. So, if you look at, like, sort of days greater than a 1% return or a 2% return or losses of the same, it’s much more pronounced in the day. And what happens is in the night we hit a lot of singles.

We do well when the markets are, you know, up or down 100 basis points or less and then we’ll do really well sometimes when the market sells off by comparison. And then we’ll have days where we dramatically underperform because the market takes off. So, you know, it’s… Yeah, that’s maybe the best color I could put around what it looks like in terms of… And I should also say every year is different, right? I can’t tell you the number of days it’s gonna happen any one year.

Two examples of it being really different. In the taper tantrum of December ’18, the market was down, like, 22% in December or something like that. It had only held the night. You were literally flat. You can’t even see it. And, you know, so that was something going on a dynamic during the day. On the flip side…

Andy: That’s incredible. Sorry. It was down 22% during the day and it was totally flat at night?

Bruce: Totally flat during the night, yeah. Now, COVID was another story. COVID, the markets were led down by the night. And if you remember the way the news flow was working back then, right, China would have some scare then it would say, you know, Europe was hospitalizing people, and by the time it got to the U.S., everybody was freaked out. So, pre-market, the markets were down a lot. And so, we saw a big drawdown coming at night. Almost all of the COVID drawdown was coming at night. Now, it did reverse in the second quarter to where night outperformed second quarter of 2020. But anyway, just the point being the market gets in these sort of moods every once in a while about where the returns are coming from.

Andy: Yeah. The animal spirits can get in a mood. That’s right. So, one more technical question. So, the night effect, it’s not really just at night, it’s really when the market’s closed, right? So, would the night effect be present on Saturday and Sunday? Would it be present on Christmas and just all…basically anytime that the market is closed?

Bruce: Yeah, exactly. That’s right.

Andy: Okay.

Bruce: You know, we’re invested… You know, it’s good to be invested when no one around you is trading in a way is one way to think about it, right? Because you’re investing over these long holidays or weekends and you’re not being scared outta your positions by, you know, volatility-induced day trading.

Andy: Yeah. It’s almost like it’s a little bit of an illiquidity premium. Like, I know that it is possible to trade at night, but for most investors, just the practicalities, you know, they’re gonna do their buying and selling during the day for structural reasons.

Bruce: And to some extent, it’s, you know, potentially an arbitrage of…you know, against the de-risking that takes place institutionally, right? You know, giving it back, and in our case, it’s to a retail investor potentially, or an advisor. So, that can feel kind of good.

Andy: Yeah, love it. That’s a very good point. That’s a good point. So, okay, let’s move forward. So, I have two other ETFs up here. Next, I want to talk about NIWM. So, this is the NightShares 2000 ETF, and I quote, “seeks to return the night performance of a portfolio of 2000 small U.S. companies.” So, is the night effect, is it potentially stronger with the small-cap companies than with the Night 500?

Bruce: Yeah. We found an unbelievable thing in the research, which is that over 20-plus years in daytime return of the Russell 2 is negative. So, more than 100% of the return was coming at night. In the case of the S&P, by the way, we found about two-thirds, maybe 75% of the return was coming at night. But in the case of the Russell, it was like…and I don’t know how to do the math because we have a negative day. But, you know, it was…the numbers were something like 9% return over 20 years with 12% coming at night and negative 3 during the day, something like that.

Andy: Wow. So, this is very, very pronounced here.

Bruce: Exactly. It’s very pronounced, yeah. Now, most factors and everything you look at seems to be more pronounced in small-cap, right? But I know in my past world at WisdomTree when we did sort of earnings and dividend-weighted stuff, we had the same impact coming on the small-cap. So, it seems to be an extension of that. Yeah.

Andy: That’s incredible. So, how is the…I guess the market reception of the small-cap? Has there been a lot of excitement about that due to the…?

Bruce: So, I think it definitely peeks people when they read our research. We just finished a look at 2022 and turns out we got kind of unlucky on our timing of the launch. So, the night effect worked for the full year. It worked really well in H1 protecting your downside. It lost a lot less than buy and hold. But if you remember that bear market rally, it started around June 30th and went to August 15th where the market went up, I think it was about 13% in 45 days, which is very unusual, most of that happened during the day.

And so, we kind of came out of the gate a little bit behind. Since then, we’ve been making up, you know, the gap. So, I think that’s, you know, just put a little damper on things. But I think people are now starting to see this as merit, you know, because what we’re offering people really is a tool that says when you look at the history, you’d rather have more night than day. But you don’t want to abandon the day, right? You know, that’s just not realistic for most advisors, right?

Andy: Yeah.

Bruce: So, we just kind of let you tilt into the night. So, you know, if you’re…if you start out, you know, sort of 50/50 day, night as everyone is, you know, maybe you wanna go 60 night, 40 day, that’s what you can do using NightShares.

Andy: Okay. So, well that… Now I got a couple more questions because… Okay. So, this is all part of our series on liquid alts and alternative ETFs. And I’ve…I guess when I was reading about NightShares ETF, you know, I kind of bucketed them into the alternatives bucket because it’s an alternative strategy, right? It’s still in sort of operating in this traditional equities, U.S. equities universe, but it’s an alternative strategy.

So, would you…you know, taking off your ETF issuer hat and putting on your individual investor hat or sitting in the seat of an advisor, would you consider this to be like a tilt of, like, in a 60…would this be a tilt in a 60/40 portfolio, a tilt for the 60, or would this be more part of like a 50/30/20 portfolio where there’s a 20% allocation to alternatives? Would this kind of fit more into the alternatives bucket? I mean, I guess how do most advisors think? I guess is what I’m really…

Bruce: Yeah. I do think, you know, I’ve heard both, right? I think people can think of either way. I think the case for alts is night and day are highly uncorrelated with each other, so that’s important. You know, just by breaking up the 24-hour session into 2 different sessions, you now have 2 different, you know, sort of return streams. And, you know, we haven’t really talked about the volatility reduction, but that’s a really important thing about this and that sort of feels alt-like.

In 2022, I just…I’m gonna look at some numbers here, I think the volatility of the S&P 500 was 20% roughly. Sorry, 24% and night was 13.3%, right? So, it’s a big reduction in volatility and that tends to put it into the alts bucket as well. When I say, you know, we let an advisor tilt, I think, you know, the reality of their business is, you know, they have clients who want to keep up with the market. And so, I see it more as a tweak there, you know, to the 60/40 where you, you know, just tweak it to be more night. And we have one other product to talk about and maybe I can segue into our third one.

Andy: Yeah. So, yeah, and I actually…let me tee it up with…because I have notes from each webpage. So, this last ETF that we’re gonna discuss, this ETF is NSPL, and this one’s definitely a little bit different from what I was reading. So, “Speaks to provide investment results before fees and expenses that correspond to 100% 1x of the performance of a portfolio of 500 large-cap U.S. companies during the day and to 150% 1.5x of the portfolio performance at night.” So, this is a little bit of a different strategy still obviously leveraging the night effects. So, where does this fit in from a product standpoint?

Bruce: Yeah. I’ll get back to your question about alts versus tilts. So, this one’s interesting because you don’t have to give up the day, but we lean into the night by having a 50% night exposure. We do that because it turns out, you know, you wanna leverage up the highest Sharpe ratio part of your portfolio, right? And even though we leverage the night 50%, the total volatility of the product is just a little bit higher than buy and hold.

Andy: Okay.

Bruce: So, for example, it’s because the night is a low volatile session, it’s not injecting tremendous volatility in your portfolio to lever it up by 50%. And so, this product NSPL, we think of maybe that’s the one that becomes really a replacement for your SPY, right? Where you’re just getting a kick but you’re still invested during the day, whereas NSPY is maybe more the alt in your way of thinking. In fact…

Andy: Or you could own SPY and NSPY and you could dial as an advisor, as an RIA, I could dial those knobs myself and kind of wait towards the night effect however I wanted. But with this, with NSPL, it’s one bundled product that’s sort of pre-packaged with that tilt.

Bruce: Exactly. So, when we look at the numbers on these two, they kind of sandwich the SPY buy and hold. So, the NSPY gets about 75% of the return with about 60% of the volatility historically of, you know, the night effect. That’s what it’s done. The NSPL, when you leverage the night 50%, historically you’ve got about 300 basis points more than SPY and your volatility went up from maybe 20 to 23, something like that. So, you had a little more vol, but you got substantially more return. So, that’s…so you have two ways to sort of think through an alternative to your large cap.

Andy: Interesting. Okay. You know, my experience with new ETF launches, I mean, especially ones that are alternative ETFs that maybe have some more, I almost wanna say exotic strategies or not necessarily that exotic, but, you know, might be new to people, might be new to an advisor. They can take some time to amass assets, AUM, to make ’em, you know economically viable.

But one thing has kind of stuck out at me from our conversation so far, which is that this works over time, it doesn’t work every time, and that a lot of people knew of this, but, you know, no one had ever really seen it in practice in a practical standpoint. So, do you think that…you know, is this gonna be an easier sell, so to speak, after it’s been operating two, three years? Because I feel like then it’s no longer look at the academic research. At some point, you can just say, let’s look at what these ETFs did, let’s look at how much volatility and return they did. Is that kind of part of the entrepreneurial, you know, vision for these?

Bruce: Yeah. I mean, you…absolutely right. Everyone, you know, likes to hear about new ideas, right? Not that many people want to take action on them, right, until they have more proof. And so, that…you know, that’s…we’re gonna build a track record over time and give them a sense for it. So, absolutely there. You know, but we think this is a very big addition to the ETF landscape in the sense of there’s nothing that quite does it like this.

And it’s got multiple uses as we started talking about whether it’s, you know, a risk reduction kind of volatility dampening effect on the portfolio, or in the case of NSPL, you know, a return enhancement product. So, there’s lots of different ways to think about the night effect. And yeah, we’re looking forward to sort of, you know, seeing how it goes over time as well. We’re quants at heart and we trust the numbers and the numbers say this thing works over time.

Andy: Yeah. It’s gotta be a little bit beautiful like watching your baby grow up now that these are finally, you know, in market. And I guess back to the blackjack analogy, time should be in your favor, right? The longer that these exist, the more of the track record will build up.

Bruce: Yeah. Absolutely.

Andy: So, when you launched these new ETFs, did it take a lot of people by surprise? Because I was doing some research on your ETFs and I came across this piece on VettaFi. Obviously, VettaFi, a huge name in the ETF space. And this is a quote I have from Lara Crigger, their editor-in-chief, the title of this piece was “Best New ETFs of 2022.” And she’s quoted as saying, “There were some amazing under-the-radar launches, weren’t there? The NightShares ETFs are one of those fun families I genuinely didn’t see coming.” And that’s a statement from one of the top, you know, thought leaders in the ETF space. So, it sounds like your family of ETFs really took some folks by surprise.

Bruce: I think that’s fair. You know, again, I had been in the business a long time and never seen the research, and a lot of people who are very intelligent in this space also hadn’t seen the research even though some had. And so, I think that was the reason for surprise. We certainly ourselves you know, tried to keep it under wraps as long as we could. So, yeah, I think that’s why. But now, now people are, you know, getting more familiar with it and it’s not such a surprise anymore, and now they’re getting acclimated to it. You know, it takes a little bit of time to think about how do I work this anomaly into my portfolio, you know, and that’s where the conversations have gone to now. But it’s nothing wrong with surprising people.

Andy: Yeah, no, I agree. Yeah. I mean, thinking of an RIA or a fiduciary, there’s a little bit of…I don’t wanna say a paradox there because you wanna be open to new products, you wanna be open to innovations that can enhance…you wanna be open to innovations that can enhance returns while decreasing risk, which is exactly, you know, the stated goal or the stated result, I should say, of this. But at the same time, you know, you don’t wanna rush in to something new and unproven.

Bruce: Right.

Andy: So, there’s a little bit of a paradox there because obviously ETFs, they need to, you know, amass some AUM to be viable.

Bruce: Yes.

Andy: Is everyone buying into these ETFs? Are they all kind of buy and hold long-term investors? Is there anybody day trading?

Bruce: Yeah. That’s a great question. You know, they seem to be buy-and-hold investors who just look…yeah, there are. I think, you know, the day trading thing’s interesting. I’m a little surprised there’s not more. There are certain days where, you know, for example, take Thursday coming up with the CPI print, right? It’s interesting to have a strategy that gets out in the morning, right? So, if the market moves higher, you’ll have the rest of your portfolio working for you, but if it doesn’t, you’ll be out on a chunk of it. So, I’ve been a little surprised there hasn’t been more… I also thought there’d be more people sort of pontificating about when it works and doesn’t work than we’ve seen. So, I’m hoping that more people sort of dig in and do their own sort of research and, you know, give their opinion about when this thing works.

Andy: Yeah, absolutely. Well, every day…every market close and market open, I guess is just adding to the track record, adding to the amount of data that any third party can come in and look at. So…

Bruce: Absolutely.

Andy: Zooming out, okay, beyond the night effect, obviously you’ve been involved in the ETF space really almost from the very beginning and in that broader world of liquid alts. What are the most powerful trends that you see playing out in that liquid alts world right now? Maybe even any predictions in the alternative ETF space in the next year or two. You wanna go out on a limb and…?

Bruce: Well, I mean, I think for a long time, right, you’ve seen a lot of innovation in the ETF space, and a lot of it has been trying to package up strategies that used to be in hedge funds, various, you know let’s call it asymmetric return kind of strategies. And so, I think that’ll continue it. And by the way, with NightShares, you know, that…I’d seen a lot of ideas about things, you know, I could start a business on, I just didn’t get excited about it until I saw this research. And I think it’s a challenge, which is there’s a lot of product out there, you know, and so you have to do things that are different.

But the biggest change with the alts is that the customers seem much more receptive to them. This past year they finally did really well, like, after a lot of years. And things like managed futures is a good example. You know, it had a lot of lean years and it performed really well. So, I think there’s definitely a lot of openness among the advisors for more strategies. And as a result, I’m sure you’ll see more green.

Andy: Do you see a lot of…you know, a lot of the more boutique ETF issuers continuing to innovate, or do you think it takes, you know, a larger base of AUM and a larger existing product family to really compete with new ideas, with new ETFs?

Bruce: It’s a great question. You know, I’ll just give my own experience first, which is, you know, I feel like our idea is actually bigger than many of the ideas I’ve launched product on in the past. But the ETF market has changed to the point where, you know, there’s many more gatekeepers, there’s many more people that just won’t touch a product until it has, you know, X hundred million dollars and X year track record. So, the landscape’s more difficult. But, you know, the boutiques, I mean, there’s still…there’s definitely still a lot of innovation coming from the boutiques. And then you’ve also seen, you know, just about every mutual fund company now has really decided like, I have to be in this space, you know, and they’re doing conversions now of mutual funds into ETFs. And so…

Andy: That was Jim Atkinson. And that was…they did, like, the first mutual fund to ETF conversion, isn’t it?

Bruce: Conversion. I don’t remember exactly.

Andy: Yeah. I think…I’ll check my notes. I think that was Jim Atkinson’s fund. I only know that because I was his intern. I worked for him. It was my first job in finance. So, I think he kind of made history with that. That was…was that about a year ago or so with the first mutual fund to ETF conversion?

Bruce: I’m not sure the first one, but the floodgates have opened, you know? You just saw…seen companies like Capital Group and let me think who else, but some pretty big companies, DFA, you know, who’ve done them now.

Andy: Got it.

Bruce: Some big players. I mean, honestly, we thought it would happen earlier. You know, the mutual fund industry, you know, I think had a… took ’em a long time to get their act together that ETFs were gonna stick around for a while.

Andy: Do you think…? So, you think… Yeah, and I just pulled up this link. I have it on Citywire. The headline is, “‘We now know we can do it’: Guinness Atkinson CEO bets on more ETF conversions.” And it was indeed Jim Atkinson. So, you see more of those conversions potentially happening in the next few years?

Bruce: I think so. I think so. I don’t see any reason not to. I mean, I’ve never compared the total mutual fund plus ETF fund count, but my guess is that there are not a lot of new mutual fund launches. There are many more ETF launches, so maybe net-net it’s not going up and it’s just shifting.

Andy: Yeah. No, that makes sense. So, Bruce, I can’t thank you enough for sharing, you know, your insights on the ETF industry, liquid alts, as well as the night effect. I mean, it’s really fascinating stuff. I think a lot of our viewers and listeners would be interested in digging in a little bit more. So, that being said, where can they go to learn more about your research and about the NightShares ETFs?

Bruce: Yeah. is the website. There’s a lot of information there. We’ve even put some of the white papers on there. You know, there’s a place on the website to contact us. We’d be more than happy to have a chat and, you know, encourage people to take a look and give us a try.

Andy: Absolutely. And I’ll be sure to link to these three tickers, the white papers. I’ll be sure to include all of those on our show notes page, which are always available at Bruce, thanks again for coming on the show today.

Bruce: Thanks so much, Andy. Take care.

Andy Hagans
Andy Hagans

Andy Hagans is co-founder and CEO at AltsDb, and host of The Alternative Investment Podcast. He resides in Michigan.