Roll Yield in Practice
A fund holding futures must roll them forward. The shape of the futures curve determines whether that roll costs money or earns it, and over years the effect dominates.
MadStockAlerts Research · Updated August 29, 2026
What to take away
- Contango means later contracts are more expensive, and rolling sells cheap and buys dear.
- Backwardation is the reverse and produces a tailwind.
- The effect compounds and can dominate the spot price's contribution.
- This is why some commodity products diverge enormously from the spot price.
- The curve shape is observable in advance rather than discovered afterwards.
MAD Academy Training Video · 0:46
Losing Money in a Rising Market
Roll yield can make a commodity fund fall over a year in which the underlying commodity rose, and the futures curve is where you see it coming.
This lesson is part of a Stock Alerts + Tools plan.
Why rolling is necessary
A futures contract expires. Any vehicle maintaining continuous exposure must close the expiring contract and open a later one, and that transaction happens at whatever prices the two contracts are trading at.
| Curve shape | The roll | Effect over time |
|---|---|---|
| Contango: later contracts dearer | Sell low, buy high | A persistent drag |
| Backwardation: later contracts cheaper | Sell high, buy low | A persistent tailwind |
| Flat | Roughly neutral | Little effect |
The drag is not a fee and it is not avoidable by choosing a cheaper product. It is a property of holding futures exposure in a market whose curve slopes upward, and every vehicle doing so incurs it.
How large the effect gets
A roll cost of one percent per month compounds to roughly twelve percent a year. Over several years, a product tracking a commodity through futures can fall substantially while the spot price is unchanged.
| Monthly roll cost | Annual drag | Over 5 years |
|---|---|---|
| 0.3% | About 3.5% | About 17% |
| 1.0% | About 11% | About 45% |
| 2.0% | About 21% | About 70% |
This is the mechanism behind a documented and recurring disappointment: a holder correct about a commodity's direction over years, holding a futures-based product, and losing money. The exposure was never to the spot price.
Scroll the chart sideways to see all of it.
- Spot price
- Futures-based product, 1% monthly roll cost
Why curves take the shape they do
- Storage costs push later contracts higher, since holding the physical commodity costs money.
- Financing costs do the same, since capital is tied up until delivery.
- A convenience yield pushes the other way: holding the physical commodity has value to a user who needs it.
- Expected shortage produces backwardation, since immediate delivery commands a premium.
Storable commodities with ample supply therefore tend toward contango, and commodities in immediate shortage tend toward backwardation. The shape is a statement about current supply relative to demand, which is why it changes.
What the structures do about it
| Approach | How it addresses the drag |
|---|---|
| Front-month rolling | Does not. It incurs the full effect, and tracks spot most closely day to day |
| Longer-dated contracts | Rolls less often and sits further along the curve, where it is usually flatter |
| Optimised roll | Selects the contract with the most favourable spread rather than the nearest |
| Holding the physical | Avoids the roll entirely, and is only possible for storable, high-value commodities |
The last row is why precious metals products can hold the metal itself while energy products cannot. The distinction is physical rather than financial, and it is the reason those two parts of the commodity complex behave so differently in a wrapper.
Estimating the drag before buying
The roll cost is not a surprise discovered later. The futures curve is published, so the cost of the next roll is observable, and an annualised estimate follows from it.
- 1Read the front two contractsTheir prices are quoted and the difference is the immediate roll spread.
- 2Express it as a percentageThe difference divided by the front contract's price.
- 3Annualise itBy the number of rolls per year the product performs.
- 4Compare it against the expected moveA view has to overcome the drag before it produces anything.
The fourth step is where most of these positions should be reconsidered. A drag of fifteen percent a year means a view has to be right by more than fifteen percent a year merely to break even, which is a substantially stronger claim than the one usually being made.