Futures Roll Yield: Contango and Backwardation

Long-term investors in futures-based ETCs face the structural hazard of roll yield decay. Every futures contract expires, so the fund must perpetually sell the expiring month and buy the next one, and the shape of the futures curve decides what each roll costs. The mechanics — contango, backwardation, and the roll methodologies a fund can choose among — have their full treatment in section “Futures Roll and Roll Yield”; what matters here is the size of the effect. Numbers: spot oil at $70 and the next-month contract at $72 means the fund rebuys its own position 2.8% higher every month with the commodity itself flat — roughly a 29% annual bleed in a persistent contango. In backwardation the same mechanism pays you instead.

Due to chronic contango in energy markets, products like United States Oil Fund USO(.70%) or United States Natural Gas Fund UNG(1.01%) are unsuitable for buy-and-hold strategies, serving only as short-term tactical trading instruments.