Roll Yield
Roll Yield is the gain or loss generated when a futures investor rolls an expiring contract into a new contract at a later expiration date, arising from the difference in price between the two contracts — positive in backwardated markets and negative (a drag) in contango markets.
Roll yield is one of the most important and often misunderstood components of commodity futures returns. Most investors who want ongoing commodity exposure cannot hold a single futures contract to delivery (which would require physically receiving barrels of oil, metric tons of copper, or bushels of soybeans). Instead, they hold a position in a near-term contract and periodically roll it forward — selling the expiring contract and buying the next one — to maintain continuous exposure.
In a contango market, the next-month contract is more expensive than the expiring one. Rolling means selling low (the expiring near-dated contract) and buying high (the more expensive next-month contract). This negative roll yield erodes returns even if the underlying spot price stays flat. During 2009-2014, persistent contango in the crude oil futures market caused commodity ETFs like the United States Oil Fund (USO) to dramatically underperform spot oil prices — USO could be down even in years when oil prices rose, purely because of roll costs.
In a backwardated market, the opposite occurs: the next-month contract is cheaper than the expiring one. Rolling generates a positive yield — selling high and buying low. Historically, commodities that are most frequently in backwardation (oil during supply-tight regimes, agricultural commodities near harvest shortfalls) have generated higher long-run futures returns, consistent with a risk premium for bearing the inconvenience of not holding the physical commodity when it is scarce.
The roll yield is distinct from the spot return and the collateral return (interest on margin). A complete analysis of a commodity futures investment must account for all three components. Academic research by Gorton and Rouwenhorst (2006) and subsequent studies have shown that roll yield — rather than spot price momentum — is often the most reliable predictor of long-run commodity futures excess returns.
Active commodity fund managers seek to improve on passive roll strategies by rolling into contracts at different points along the curve — avoiding the peak of contango by rolling into further-dated contracts with lower storage costs, or positioning in the most backwardated part of the curve. This active management of roll strategy is one of the primary value-add claims made by sophisticated commodity managers.