Long-term investors in futures-based ETCs face the severe structural hazard of roll yield decay. Because futures contracts have expiration dates, the fund manager must continuously close out expiring contracts and purchase the next month’s contract. The shape of the futures price curve determines whether this rolling process generates a profit or a loss:
Occurs when the futures price is higher than the spot price. To roll the position, the fund manager must sell expiring contracts at a lower price and buy the next month’s contract at a higher price. This creates a negative roll yield. Over time, contango systematically erodes investor principal, even if the spot price of the commodity remains flat.
Occurs when the futures price is lower than the spot price. Rolling the position generates a positive roll yield, as expiring contracts are sold at a premium to the purchase price of the next month’s contract.
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 highly inefficient for buy-and-hold strategies, serving only as short-term tactical trading instruments.