In a contangoed market, the ETF loses money each time it rolls contracts to a costlier later-dated contract – the fund would technically sell low and buy high. Additionally, potential investors should note that in a contangoed market, futures-based commodity ETFs can experience heavy losses even if the underlying commodity’s spot price rises. [Backwardation & Contango]
For example, the United States Natural Gas Fund (NYSEArca: UNG) and the United States Oil Fund (NYSEArca: USO) have seen losses over the long-term due to contango, but they have been fine over the short-term.
Nevertheless, there are a number of funds that utilize a blend of futures contracts with various maturity dates to help diminish the effects of rolling front month contracts, such as the PowerShares DB Oil Portfolio (NYSEArca: DBO) and the United States 12 Month Natural Gas Fund (NYSEArca: UNL).
For more information on ETFs, visit our ETF 101 category.
Max Chen contributed to this article.