Finally, there seems to be light at the end of the tunnel for oil exchange traded funds (ETFs) caught in the recent contango mess. Take for example, the iShares S&P GSCI Commodity Index (GSG) and the United States Oil Fund (USO). Both have had varied performance because of contango issues but now look as if they are on track to perform in tandem.
As Matt Hougan of Index Universe says, many investors do not fully understand commodity futures ETFs. He lists three factors that drive commodity futures investments:
1) Changes in the spot price
2) Interest income: You only have to put up a small fraction of your money to buy futures, and the rest can be invested in Treasuries.
3) The roll yield: Futures contracts expire each month, and you must sell the expiring contract and buy the next month’s contract when that occurs. If the next month contract is priced higher, you lose money compared to the spot price: That’s contango. If it’s priced lower, you make more money than the spot price: That’s backwardation.