If the current price of oil is lower than the future price, it’s a classic case of contango. In the opposite situation, it’s known as backwardation. Most commodity funds buy the “near month” contract, then roll it over before it expires and the next month’s contract is bought (known as “rolling forward.”)
The risk is that a negative roll yield could cause the net asset value (NAV) of a fund to drift from the spot price.
Different funds hold different things: some commodity funds hold futures, others hold the physical commodity and others hold companies involved in the production of a specific commodity. Our commodity special report lists some of the largest ones and details what’s in them.
These ETFs work exactly as they ought to. For investors looking at them, it’s worth a minute or two to drill down into a fund and identify potential risks, what the fund holds and any other information you can discover about it. As ETFs get more exotic, it’s going to become increasingly important for investors to do the necessary research to avoid getting hurt.
ETF providers are working hard on the education front, with comprehensive education sections on their blogs, as well as hosting podcasts and webinars for investors to learn more. In addition to that, we have an ETF education page you can peruse for articles on different types of funds.
For more stories about leveraged and commodity funds, view our category pages.
