Contango/Backwardation

Contango/Backwardation

These are terms seen across the commodity ETF space. They pertain to roll costs associated with moving from one futures contract to another. When an expiring futures contract is cheaper than—or trading at a discount to—the next month’s contract, the futures curve is in contango. Contango translates into roll costs to an investor (or an ETF) having to move from one contract to the next. The opposite of contango is backwardation, when the expiring futures contract is trading at a premium to the next contract. Contango and backwardation impact commodity futures and futures-based ETF returns. Many commodity ETFs try to optimize their roll strategy to circumvent the impact of contango on returns.