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As the WTI Futures Contracts included in the Index come to expiration, they are replaced by contracts that have a later expiration. For example, a contract purchased and held in September may specify an October expiration. As time passes, the contract expiring in October is replaced by a contract for delivery in November. This is accomplished by selling the October contract and purchasing the November contract. This process is referred to as “rolling”.

The rolling keeps an investor fully invested. The roll return will be positive when the futures curve is downward sloping (“backwardation”) or negative when the futures curve is upward sloping (“contango”).

Example of the effects of a rollover

Here is a simple step-by-step Contango example using the table below:

 

Day 0 
the ETF enters into the 1st nearby futures contract at the level of 100.
1 month later from Day 0 
the ETF closes out the position by selling the 1st nearby futures contract at 110 then enters into the 2nd nearby futures contract at 113, i.e. the ETF has a negative roll yield of -3 from this rollover trade.
2 month later from Day 0 
the ETF closes out the position of selling 2nd nearby futures contract at 115.
Calculate the ETF profit  from Day 0  
When we calculate the profit of the ETF, we must take count negative rollover yield, -3. Therefore, the profit of the ETF is 115 – 100 – 3, which is 12.

 

  Day 0 1 month later (rollover trade)

2 months later

1st nearby futures 100 110  /
2nd nearby futures 102 113 115

 

 

(The table is for explanatory purpose only and prepared by Samsung Asset Management (HK Ltd.)