Roll Yield

Roll yield is the part of a futures position's return that comes from the shape of the futures curve rather than from changes in the spot price. As a futures contract approaches expiry, its price converges towards spot. If the contract started above spot (contango), that convergence pulls it down; if it started below spot (backwardation), convergence pulls it up. Long term futures investors, especially in commodities, find that roll yield can matter as much as the spot price over time.

Breaking down futures returns#

For a fully collateralised long futures position, total return can be split into three parts:

futures excess return ≈ spot return + roll yield

Positive and negative roll yield#

See Contango and Backwardation.

Estimating roll yield#

A simple annualised estimate uses the first two contracts:

annualised roll yield ≈ (F1 - F2) / F2 × (12 / months between contracts)

Roll yield in practice#

• Commodity index returns have historically depended heavily on roll yield. Research by Gary Gorton and Geert Rouwenhorst (2006) and later work found that commodity futures returns varied with curve shape, and that commodities in backwardation tended to outperform those in contango.
• Energy: oil has swung between steep contango (2015, 2020) and steep backwardation (2022), causing large differences between oil fund returns and spot oil changes.
• VIX futures: persistent contango produces strongly negative roll yield for long positions. See The VIX.
• Equity index futures: roll yield reflects interest rates minus dividends, a financing cost rather than a commodity effect.

Carry strategies#

Because roll yield is visible in advance from the curve, systematic strategies can tilt towards markets with positive roll yield (backwardation) and away from those with negative roll yield (contango). This is the commodity version of the carry factor, also applied to currencies (interest differentials) and bonds (yield and roll down). See Carry Factor and Carry Trading.

Roll yield is not free#

Roll yield is the expected return if spot stays where it is. But curve shape often reflects real supply and demand. A market in backwardation may be tight because of a disruption that later resolves, sending spot down. The roll yield estimate is not a promise of returns; it describes one component of them.

Reducing negative roll yield#

• Hold later months when the front of the curve is steeply in contango.
• Use optimised roll strategies that choose the contract month with the least contango.
• Avoid long holding of products with persistent negative roll, such as long VIX funds.
• Trade calendar spreads to express views on the curve itself. See Calendar Spreads in Futures.

Frequently asked questions#

What is roll yield?#

The return from a futures contract's price converging toward the spot price as expiry approaches, determined by whether the curve is in contango or backwardation.

Is roll yield positive or negative?#

It is positive for long positions in backwardation and negative for long positions in contango.

Why do commodity ETFs underperform spot prices?#

Often because they roll futures in contango, which creates negative roll yield that drags returns below the spot price change.

Next, learn how hedgers think about the gap between spot and futures in Basis and Basis Trading.