Roll Yield

What Is Roll Yield?

Roll yield is the gain or loss that comes from replacing an expiring futures contract with a later-dated one. Futures contracts expire, so investors who want continuous exposure to a commodity or other asset must sell the near contract and buy a further-out contract, a process called rolling. The price difference between those two contracts can add to or subtract from returns, separate from any change in the underlying asset's price.

How It Works

Futures prices for later delivery dates often differ from the spot price and from each other. The pattern of these prices across expiration dates is called the term structure. Two common patterns drive roll yield:

• In contango, later contracts trade above nearer ones. A holder who rolls sells the cheaper expiring contract and buys the more expensive one, which typically reduces returns.
• In backwardation, later contracts trade below nearer ones. Rolling into the cheaper contract can add to returns.

Roll yield is often approximated as the percentage difference between the expiring contract and the next contract:

Roll yield = (Price of expiring contract - Price of next contract) / Price of next contract

Why It Matters to Investors

Many exchange-traded funds (ETFs) that hold commodity futures roll their positions regularly, so roll yield can explain why such a fund's return differs from the change in the commodity's spot price. Over long periods, persistent contango can create a noticeable drag, while persistent backwardation can add to returns. Roll yield is not guaranteed and changes with market conditions. Investors reviewing a fund's performance can check how it handles rolling and whether the market has been in contango or backwardation.