Futures-based ETFs maintain exposure to commodities by periodically rolling the contracts before they expire.
“If the fund is rolling contracts for costlier later-dated contracts then the commodity market is in ‘contango’, which may detract from performance,” BlackRock said. “If the later-dated contracts are less expensive than the contracts held by the fund, then the commodity market is in ‘backwardation’, which may add to performance.” [Futures-Based ETF in Focus as Gold Goes Into Backwardation]
CMDT’s tracking index rolls into the futures contract that shows the most backwardation or least contango, selecting from those contracts with nine months or fewer until expiration.
Other ETF providers have also introduced funds designed to lessen the negative impact of contango. One example is U.S. Commodity Index (NYSEArca: USCI).