I am looking to invest in an ETP which is based on a Index of Commodities basket.

From previous question I understand that investing in indexes tracking Futures prices is most likely the only practical way to do this (to avoid physical storage a/o invest in companies).

Said that I am aware that the rolling process of renewal of expiring futures contracts can generate yields when the market is in contango/backwardation.

What is the best way to limit this effect so that my ETP Index will be driven only (mostly) by the underlying basket of commodities?

thank you for the help

  • Why are you concerned about taking returns when the market is in contango? This is the normal state of a futures market as futures prices reflect the cost of the spot commodity plus the cost of carry in contango. The price of a future should be more or less equal to the cost of buying the commodity now and holding it until the future date.
    – MD-Tech
    Feb 4, 2020 at 15:48
  • What does "a/o" mean here? Feb 4, 2020 at 22:43
  • @TannerSwett I assume "and/or".
    – nanoman
    Feb 5, 2020 at 1:25

2 Answers 2


There are "optimum yield" commodity indexes, that choose which dated futures contract to roll-into, that ETF's can license:



Or a commodity investment endeavor could hold futures contracts with a margin deposit representing no leverage. Then the margin deposit could be in Treasury Bills at 1.5% interest. Or the excess margin could be held outside the futures account in any investment chosen.

Or it might be advantageous to sell a long-term futures contract while buying a short-term futures contract. Well, the short-term futures contract becomes like a hedge that is clicked on-and-off while the long-term contract benefits from contango. Actually, the short-term contract has more price movement relative to the underlying commodity and the position is a bull-spread.


Simple answer: You can't eliminate the roll yield effect. But I'd say that futures performance is already "mostly" driven by moves in commodity spot prices, since these tend to be larger than the cost-of-carry contributions (e.g., a commodity easily moves 5% up or down in a month whereas cost of carry is a fraction of a percent per month).

The normal case of contango produces a negative roll yield, which represents the cost of financing and storage. The cost of financing (interest) doesn't significantly affect your return if you're not leveraged, because the cash balance (excess margin) is earning compensating interest -- as noted by S Spring. Especially for the professional investors who arbitrage an ETP, the deposit and borrowing rates are very close; thus the effect should cancel out of the unleveraged ETP performance. That leaves storage cost, which is typically quite small (because physical/futures arbitrage will be bid down by the professional bulk dealers with the lowest costs).

In backwardation, futures pricing is driven by a temporary shortage of the commodity. Here you benefit from a positive roll yield, which is the market's way of telling you that you should not store the commodity, but should profitably "lend" it (by rolling your future) to put it in the hands of people with an immediate use for it.

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