The Overnight Drift in Index Futures
Equity index returns are earned disproportionately during the overnight session, from the prior close to the next open, rather than during the regular trading day — a persistent pattern that has shaped strategies around holding through the close.
Prerequisites: Overnight vs Intraday Returns
If you split a stock index's total return into two pieces — the return from yesterday's close to today's open, and the return from today's open to today's close — you might expect each piece to contribute roughly proportionally to how many hours it covers. It doesn't. For decades, most of the S&P 500's cumulative gain has come from the overnight session, while the regular trading day has contributed far less, and at times has been roughly flat or negative on average.
Equity index futures have historically drifted upward disproportionately during the overnight window — from the close of one session to the open of the next — a pattern strong and persistent enough that a strategy of holding only overnight and staying flat during the day has, over long stretches, outperformed buying and holding through the regular session.
Measuring the split
Because index futures trade nearly 24 hours, a researcher can mark the settlement price at the regular-session close and the price at the next regular-session open and compute the two legs separately every single day. Compounding just the overnight leg across years produces a very different equity curve than compounding just the intraday leg.
Worked example
Suppose an index future settles at 4,500 at today's regular close and opens the next session at 4,518 — an overnight gain of 0.40%. During the following regular session it drifts from 4,518 to 4,512, an intraday loss of about 0.13%. A trader running the pure overnight-drift strategy buys at yesterday's close (or holds a position established at 4,500), sells at today's open at 4,518, capturing the 0.40% overnight leg, and stays in cash or flat during the day — sidestepping the intraday drawdown entirely. Compounded across hundreds of sessions, capturing only the overnight leg repeatedly has historically produced a smoother and, over many periods, larger cumulative return than staying invested around the clock.
What this means in practice
Several explanations compete for why this happens: overnight is when most scheduled macro data and earnings are released, so a risk premium for holding through that uncertainty accrues to whoever is long overnight; passive and 401(k)-style buying is concentrated near the open; and index-tracking funds executing at the close create mechanical flows described in The MOC Imbalance Reversal the Next Morning that can bleed into the next session's open. No single explanation is settled, and the pattern's strength has varied by decade and weakened somewhat as more capital has tried to exploit it directly.
The overnight drift is a pattern in average returns across a huge number of sessions — it does not mean every overnight session is safer or calmer than the daytime session. Overnight is also when scheduled events (FOMC, jobs data, foreign market shocks) hit, so any single overnight holding period can carry a large gap-risk tail that the average return figure does not show.
Related concepts
Practice in interviews
Further reading
- Lou, Polk & Skouras, 'A Tug of War: Overnight versus Intraday Expected Returns'