Roll yield

The gain or loss a futures holder takes each time an expiring contract is replaced with a later one, as the expiring contract converges to the spot price.

Example

The same flat spot price produced -5.4094% over a year in contango and +5.8016% in backwardation - a swing of 11.2110 percentage points.

Important

It is charged by nobody and totalled on no document, and it is routinely far larger than the fee every buyer does compare. A futures-based product is an exposure to the curve as well as to the price.

Related terms

• Contango — A futures curve sloping upward, with dated prices above the spot price - the ordinary state of a good that is plentiful and expensive to store.
• Backwardation — A futures curve sloping downward, with dated prices below the spot price - what happens when a good is scarce now and buyers will pay a premium to have it immediately.
• Futures contract — An exchange-traded agreement to take or make delivery of a stated quantity of a good on a stated future date, held on a deposit far smaller than the notional amount.
• Exchange-traded commodity — A listed product giving exposure to a commodity and traded like a share. It may hold the physical good, an unallocated claim on it, or futures contracts.

Lessons that explain it

• The curve, and why a fund can lag the price it tracks — Spot is set by physical supply and demand. Everything dated is set by the cost of carrying the good to that date - and when the curve slopes upward, a fund that holds contracts loses money every time it rolls, even with the price standing perfectly still. (12 min)
• Nothing arrives while you wait, and the wrapper sets the tax — Large declines with no income to cushion them, a running charge on an asset that pays nothing, a roll cost that hides inside a price - and in the United States, three wrappers around the same metal taxed three different ways. (12 min)

All 578 terms in the Investing glossary