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How does contango actually affect the price an ETF trades at?

For example, take the Unites States Oil Fund (USO) that is supposed to track the price for West Texas Intermediate (WTI) crude. It is commonly known that, as futures contracts must be rolled each month, there is an inherent inefficiency. Hence, the value of the fund deteriorates over time. I follow all of that. But what I don't understand is how that actually translates to the price a fund like USO or GLD is traded at.

  • Is there a sudden "devaluation" every month when they roll the contracts?

  • Or do investors generally just slowly adjust their valuation in the marketplace over time as the underlying holdings are reduced?

  • How does the free market generally handle this in real world application?

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No, there is no sudden "devaluation". When they roll the contract one month forward, because the new contracts are more expensive (contango), they get fewer contracts. At that point though, the total NAV is still the same (ignore transaction costs for now). Then as time goes by the value of the contracts decays (contango) and so does the price of the ETF. So the loss of value is a gradual process, as opposed to a sudden drop.

BTW I believe GLD is physically backed, meaning they hold actual commodity (gold) as opposed to futures.

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