Gold & Commodities · Pro · 4 min

Roll yield explained

You can calculate the cost or gain of rolling a futures position and explain why futures-based commodity funds can trail the spot price for years.

Flat oil, falling fund

Oil starts the year at 70 and ends it at 70. A fund that tracks oil through futures, with low fees, ends the year down 8%. Nothing went wrong in the fund's management.

The explanation is one of the least understood costs in investing: the roll. It affects almost every product that holds commodities through futures, and it can make such products trail the commodity's price for years.

Sell near, buy later

Futures contracts expire. A fund that wants to keep exposure cannot hold a contract until delivery, because it does not want barrels of oil. Before expiry, it sells the expiring contract and buys one for a later month. This is the roll, and the CFTC's 2020 advisory explains that it can make a fund lose money each time it happens.

The effect depends on the shape of the futures curve from the last lesson:

In contango, the later contract costs more. The fund sells low and buys high, so the same money buys fewer contracts. If the price does not rise, the position shrinks with every roll.
In backwardation, the later contract costs less. The fund sells high and buys low, so the same money buys more contracts. Rolling adds value.

The gain or loss from rolling is called roll yield. It comes on top of the commodity's price change and the fund's fees.

How large can it be? Economists at the CFTC studied the rolls of a large crude oil fund and estimated average costs of about 25 basis points per roll, roughly 3% a year, from the price effects around its rolls alone. In periods of steep contango, the cost of rolling the front month can be much larger.

For investors, the lesson is to look at how a product gets its exposure. A futures-based commodity fund is not the same as owning the commodity.

−2.1% vs. +3.1%

A fictional oil fund holds December futures and rolls into March.

Contango: it sells December at 70 and buys March at 71.50. With the same money, it now holds 70 ÷ 71.50 ≈ 0.979 contracts, about 2.1% fewer. If prices stay where they are, that is a loss.
Backwardation: it sells December at 82 and buys March at 79.50. It now holds 82 ÷ 79.50 ≈ 1.031 contracts, about 3.1% more.

Repeated every month in a market that stays in contango, small roll losses add up to a large gap against the spot price.

Common mistakes

Expecting a futures fund to track the spot price. Roll yield can push it away.
Ignoring the curve shape. Contango costs money, backwardation can pay.
Counting only the TER. Roll costs are not in the fee.
Holding futures-based products for years without checking. Small monthly costs compound.

The takeaway

Rolling futures in contango means selling cheap and buying dear, which costs money. In backwardation, the roll can earn money instead.

Check yourself

Quick quiz

4 questions. Instant feedback, nothing is saved.

1Tap the roll that costs money if prices stay unchanged.

Tap the chart.

In contango, the fund sells the expiring contract cheaper than it buys the next one, so it ends up with fewer contracts.
2According to a CFTC study, roughly what did a large oil fund's rolls cost on average?

The CFTC economists' study of crude oil ETF rolls estimated costs of about 0.25% per roll, roughly 3% a year.
3Oil spot prices are flat for a year, and the market stays in contango. What happens to a futures-based oil fund?

Each roll buys fewer contracts at higher prices. Without price gains, the fund drifts lower.
4In which market shape can rolling earn money?

In backwardation, the next contract is cheaper, so the same money buys more contracts.

of 4 correct.