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Wednesday
Jan262011

Who Needs the Trading Day?

The S&P 500 tracking SPY ETF has been around since 1993, and since then it has seen its assets grow tremendously because it's an easy way to gain exposure to what we call "the market" in the US.  If you had bought and held the SPY ETF when it began trading back in 1993, you would have a cumulative return of 194% (not including dividends). 

If you follow the markets regularly, you likely track how the market does in after hours and pre-market trading.  The SPY ETF trades a lot of shares outside of the 9:30 ET to 16:00 ET trading day.  Depending on the news of the day, SPY either opens up or down versus the prior day's close before it moves during regular trading hours.  And history has shown that you're better off invested in the market in the after hours and the pre-market instead of from the open to the close of trading.  Since it began trading, the SPY ETF has averaged a daily change of 0.04% from the close of trading to where it opens the following day.  The ETF has averaged a daily change of -0.01% from the open to the close of trading.  This means that if you just bought the SPY at the open and sold at the close every day, you'd be down since 1993.  If you bought at the close and sold at the open, you'd be up more than simply buying and holding (not factoring in taxes).

As noted earlier, SPY is up 194% since it began trading.  As shown below, the compounded return of buying at the close and selling at the open has done much better than that at +378% over the same time period.  On the other hand, if you bought at the open and sold at the close every day since SPY started trading, you would be down 38.6%!  This raises the question -- why even trade when the market is open?

 

 

 

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    Bespoke Investment Group - Think BIG - Who Needs the Trading Day?

Reader Comments (3)

It’d be interesting to see how the return of the Close to Open Strategy would be affected if the hypothetical portfolio would be represented net of all trading costs, i.e. estimated commissions.

January 26, 2011 | Unregistered CommenterPatterns

Obviously this is wrong because no commissions are included and more importantly, after you include commisisons your whole conclusion is wrong.

February 4, 2011 | Unregistered CommenterRick

I would not worry about comissions. I would worry about execution here. Seriously, I'd use more like open + 10 mins and close - 10 mins. Interesting fact though.

February 10, 2011 | Unregistered Commenternatgasguru

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