Overnight vs Daytime Returns in Sector ETFs

There is a noteworthy line of research that decomposes asset or strategy returns into daytime and overnight components. This type of decomposition has been discussed previously in the context of the volatility risk premium.

Reference [1] follows a similar approach, examining SPY and nine sector ETFs over the period 1999 to 2025. The study tests 24 simple strategies based on static long/short positions, momentum (“inertia”), and reversal rules, applied separately to daytime and overnight returns. The authors pointed out,

The results provide compelling evidence for the hypothesis that overnight periods generate stronger exploitable momentum than daytime periods. Strategy #1 (Long/Cash), which captures pure overnight returns R_i = RCO_i, consistently outperformed across all ten ETFs with final values ranging from $435 (XLP) to $3165 (XLK). In contrast, Strategy #3 (Cash/Long), capturing pure daytime returns R_i = ROC_i, generated losses in 8 out of 10 ETFs. This stark asymmetry contradicts the efficient market hypothesis and supports behavioral finance theories, which suggest reduced arbitrage activity during non-trading hours…

Conversely, the systematic failure of Strategy #2 (Short/Cash: R_i = −RCO_i) across all ETFs ($2–$18 final values) demonstrates that overnight movements exhibit persistent positive drift rather than random walk behavior. If overnight returns were symmetrically distributed, short and long strategies would show comparable absolute performance, which the data clearly refute…

The enormous outperformance documented for Strategy #18 throughout this paper is therefore attributable to the temporal decomposition of the 24 h period into distinct overnight and daytime sub-periods, rather than to the specific direction of the conditioning signal. The structural asymmetry between overnight returns (persistent positive drift, low volatility, fat tails) and daytime returns (near-zero drift, higher volatility) is the economic substrate that makes sub-period strategies profitable…

In summary, the results show that overnight returns exhibit a persistent positive drift, while daytime returns are significantly weaker, and the best-performing strategies are those that maintain long exposure overnight. A simple overnight-only long strategy also performs well and often outperforms buy-and-hold before transaction costs. Also, autocorrelation analysis suggests that the edge lies in sub-period decomposition rather than long-memory forecasting.

Note, however, that after [glossary_exclude]accounting [/glossary_exclude]for transaction costs, returns decline, making these strategies mainly feasible for managers with low execution costs.

Let us know what you think in the comments below or in the discussion forum.

References

[1] Salotra, G., Katikireddy, T., Anumolu, Y., & Pinsky, E., A Comparative Analysis of Overnight vs. Daytime Static and Momentum Strategies Across Sector ETFs, Risks, 2026, 14, 84.

Originally Published Here: Overnight vs Daytime Returns in Sector ETFs

source https://harbourfronts.com/overnight-vs-daytime-returns-sector-etfs/