Contracts have to be sold as they near expiration, otherwise you’re looking at the delivery of many barrels of oil.
But it’s not just single-commodity funds that may experience this effect. It was also seen in the Standard & Poor’s Goldman Sachs Commodity Index, which tracks 24 raw materials. During one period in May, fund managers sold their expiring contracts for $75.67 while buying futures contracts at $79.68. But by July, the futures contracts had fallen back to $75.43.
Looking at 10 well-known commodity ETFs based on futures contracts, all 10 have trailed the performance of their underlying raw materials. Since April 2006, USO has lost 50% even while crude oil has climbed 11%.
If you are interested in investing in commodities, but are concerned about this issue, here are some things you can do:
- If you’re going to invest in commodity ETFs that hold futures, do some research first to find out if prices are, in fact, in contango.
- Read the prospectus to find out how the fund works, or give the provider a call and ask. You can find the prospectus for any ETF by visiting the ETF Resume:
- If prices are in contango, look at some of the available 12-month funds, which invest in futures through the whole year, and not just the front months. This mitigates the effect of contango. United States 12 Month Oil (NYSEArca: USL) is down 5.8% year-to-date vs. USO’s 9.8% loss.
- You can look at ETFs that track commodity services companies such as SPDR S&P Oil & Gas Equipment & Services (NYSEArca: XES). [7 Commodity ETFs You Should Know.]
For more stories on commodities, visit our commodity category.
Sumin Kim contributed to this article.