“Investing in longer-dated futures contracts can do a bit to mute the effects of regular rolling, which are typically most pronounced in front-month futures,” Gabriel added. “However, this strategy isn’t foolproof, and real results are mixed at best.”
For instance, the PowerShares DB Oil Fund (NYSEArca: DBO) and United States 12 Month Oil Fund (NYSEArca: USL) provide exposure to WTI oil but include a different weighting methodology to limit the negative effects of contango. DBO can include contracts as far out as 13 months and dump contracts at any point. USL, on the other hand, ladders 12 months of contracts to diminish the effects of backwardation and contango.
In contrast, the U.S. Oil Fund (NYSEArca: USO) tracks near month crude oil futures, swapping out contracts within two weeks of expiration for the next month contract. Consequently, in a contangoed market, USO would essentially be selling low and buying high, which may cut into performance. [Widening Contango Could Cut Into Popular Oil ETF’s Returns]
For broader exposure, the PowerShares DB Commodity Index Tracking Fund (NYSEArca: DBC) and United States Commodity Index Fund (NYSEArca: USCI) eschew rolling front month contracts, which can lead to underperformance, especially in a contangoed market. Instead, DBC targets futures contracts that offer the highest implied roll yield while USCI rebalances each month and selects the most-backwardated contracts and then the seven highest-returning contracts.
Due to the way these futures-backed ETFs are structured, ETF investors may have to fill out the complex K-1 form. However, the PowerShares DB Optimum Yield Diversified Commodity Strategy Portfolio (NasdaqGM: PDBC) also tries to maximize potential roll yield returns but is structured as a 1940s Act Registered Investment Company, so investors would only have to fill out a form 1099. [An Active Commodity ETF That Optimizes Returns]
For more information on the commodities market, visit our commodity ETFs category.
Max Chen contributed to this article.