What is Contango, Backwardation, and Roll
Yield?
Contango
ROLAND MORRIS: Contango describes the shape of a futures curve with
appreciating prices. This may cause problems when you're carrying such a
product as an investment, because when it comes to the roll date, you must sell
the forward contract and replace it by purchasing the next contract at a higher
price. This creates negative roll yield, which is similar to negative carry in
other investment products.
Backwardation
MORRIS: Backwardation describes a forward futures curve with
declining prices. This is a situation where you can create positive roll yield.
When it comes time to roll the contract, you must sell the front contract at
the higher price and replace the position with the next contract at a lower
price. This creates positive roll yield, which is very similar to positive
carry in other investment products.
Drivers of
Returns
MORRIS: We've now
discussed roll yield, both negative and positive, and what creates roll yield.
It is an important component in the commodity investment. There are three
drivers of returns: the return on collateral or unused cash, the appreciation of
the underlying commodities, and roll yield.
- - - -
- - - - - -
IMPORTANT
DISCLOSURE
The views and
opinions expressed are those of the speaker and are current as of the video’s
posting date. Video commentaries are general in nature and should not be
construed as investment advice. Opinions are subject to change with market
conditions. All performance information is historical and is not a guarantee of
future results. For more information about Van Eck Funds, Market Vectors ETFs or
fund performance, visit vaneck.com. Any discussion of specific
securities mentioned in the video commentaries is neither an offer to sell nor a
solicitation to buy these securities. Fund holdings will vary. All indices
mentioned are measures of common market sectors and performance. It is not
possible to invest directly in an index. Information on holdings, performance
and indices can be found at vaneck.com
Please note that Van Eck Securities Corporation offers investment
products that invest in the asset class(es) included in this video. Hard Assets
investments are subject to risks associated with real estate, precious metals,
natural resources and commodities and events related to these industries,
foreign investments, illiquidity, credit, interest rate fluctuations, inflation,
leverage, and non-diversification.
No part
of this material may be reproduced in any form, or referred to in any other
publication, without express written permission of Van Eck Securities
Corporation. © 2014 Van Eck Global.
Van Eck
Securities Corporation, Distributor
335 Madison
Avenue, New York, NY 10017