(Bloomberg) -- Two new exchange-traded funds trying to capitalize on overnight equity gains, or so-called “night effect,” are taking a hit.

The NightShares 500 ETF (ticker NSPY) and the smaller-cap NightShares 2000 ETF (ticker NIWM), have trailed their broader benchmark indexes by over 11 and 13 percentage points, respectively, since their release on June 28. NSPY tracks the S&P 500, while NIWM tracks the Russell 2000. The ETFs use futures and swaps to allow investors to buy stocks at the market close and sell them at the next trading day’s open.

“The negative performance differential between the NightShares ETFs and their broader indexes is eye-popping thus far,” Nate Geraci, president of The ETF Store, said.

Stocks bought at market close and then sold at market open the next day can deliver better returns than just owning stocks during market hours. Events such as earnings announcements and news are often released after the regular trading session and contribute to stocks’ performance, hence the night effect. 

“There’s plenty of academic literature showing the night effect exists, but actually capturing it in a live trading environment is easier said than done,” Geraci said.

When the NightShares ETFs, issued by AlphaTrAI Funds, launched it hoped to take advantage of the phenomenon. 

“A case could also be made that once everyone is aware of a potential source of alpha, it quickly gets arbitraged away,” Geraci said. “The ETF closure bin is littered with products that had spectacular back tests and then saw their faces ripped-off once out in the wild.”

The funds’ management fees and transaction costs could also be offsetting gains, Geraci said. Each fund carries a 0.55% management fee.

Among other worries is the level of volatility of the current market and stocks’ unusual performance after earnings results. Recently, some stocks have risen despite companies missing earnings expectations.

“It’s been that kind of market where it’s certainly not what you would typically observe,” Max Gokhman, chief investment officer at AlphaTrAI Inc., said, adding that it has been a bad earnings season as it relates to the night effect.

“We’re going through a bear market rally right now in part because a lot of the bears have gone into hibernation -- we saw a lot of degrossing in June and I think July took advantage of that,” Gokhman said. “That’s where you have these weird effects of stocks posting misses, and then still going up on relatively low volume. Once that goes away, we’ll naturally get back to a more two-sided market. And I think that will result in conditions that should be favorable for the night effect.”

(Corrects chart and reference to funds’ performances against their benchmarks in second paragraph)

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