Roll Yield in Oil ETCs

How roll yield works in an oil ETC

Roll yield is the gain or loss a futures-based oil fund makes each time it swaps an expiring oil futures contract for a later one. A roll yield oil ETF or oil ETC can therefore return something different from the spot price of oil (the price for immediate delivery), even when the oil price itself has ended up where it started.

An exchange-traded commodity (ETC) is a listed product that tracks a commodity price. Many oil ETCs are issued as debt notes, and most do not hold barrels of oil. Instead they hold futures contracts, which are agreements to buy or sell oil at a set price on a future date.

Futures contracts expire, so a fund that wants ongoing exposure must sell the expiring contract and buy the next one. This is called rolling. The price difference between the two contracts, and what it does to the fund's value, is the roll yield.

Contango and backwardation: why roll yield changes sign

The size and direction of roll yield depend on the shape of the futures curve, which is the set of prices for contracts with different delivery dates. When later contracts cost more than nearer ones, the market is in contango. When later contracts cost less, it is in backwardation. Our guide to contango and backwardation covers both in more depth.

In contango, a fund sells a cheaper expiring contract and buys a more expensive later one, so each roll costs money and roll yield is negative. In backwardation, the fund sells a dearer contract and buys a cheaper one, so roll yield is positive. The shape of the curve changes over time, so roll yield can help in one period and hurt in the next.

Worked example: one monthly roll

Suppose a fund holds a futures contract priced at 80 dollars per barrel, and the next-month contract is priced at 82 dollars. The fund sells the first contract and buys the second, paying 2 dollars more per barrel.

Now suppose the oil price is still 80 dollars when the new contract expires. The fund has lost 2 dollars per barrel, about 2.5 percent, even though the oil price ended where it started. This is a simplified example. Real funds also earn interest on their cash collateral and charge fees, covered in the next section.

Why long-term returns can differ from the oil price

An oil ETC's total return combines several parts: the change in the futures price, the roll yield, interest earned on the cash that backs the futures positions, and the annual fees. Over long periods these can add up to a result that looks very different from a chart of the spot oil price. Long stretches of contango have been a steady drag on some holders, while backwardation has added to returns at other times.

Market structure can matter as much as the price itself. In April 2020, front-month US crude oil futures briefly traded below zero, and several futures-based oil funds took heavy losses as they rolled and expired their contracts.

Oil prices are volatile, and you can lose money when investing in oil ETCs, even if you understand how they work. This article explains the mechanism only and does not suggest whether any product suits you. Read the product's key information document (KID), which shows how it rolls contracts and what it charges. For comparison, see the Brent oil price page.

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