Oil exchange traded funds have jumped this week as the futures curve for West Texas Intermediate moved into “backwardation” for the first time in about three years.
“This means means index investors (mainly in the USO ETF) whose returns have been compromised since late 2008 despite oil’s rise from $30 to $90 a barrel, are finally making money on the ‘roll yield,’ as they sell the front month and buy later months,” Tradition Energy analyst Addison Armstrong said in the CNBC report.
The oil ETF and some other commodity funds buy futures contracts to get exposure to markets, rather than holding physical commodities. Instead of taking delivery, these ETFs “roll” the contracts to maintain exposure. Therefore, they don’t track the spot price investors see quoted in reports.
When the futures curve has an upward slope, markets are said to be in “contango.” This can drag on oil ETF performance because the longer-dated futures are more expensive, and the funds lose money on the roll trade. However, when markets are in backwardation, the trade can provide a lift.