Glossary
Contango
A futures market in which later-dated contracts trade above nearer ones or the spot price, which erodes returns when rolling long positions.
Contango describes a futures curve that slopes upward: contracts for delivery further in the future cost more than nearer ones, and more than the Spot price. The opposite shape, where nearby contracts are dearer, is called backwardation. The shape matters to anyone who holds futures over time, including many commodity ETFs.
Why curves slope upward
For a storable commodity, buying now and holding until a future date means paying for storage, insurance and the interest on the money tied up. A future price above spot by roughly those carrying costs is therefore normal. Contango gets steep when there is a glut and storage is scarce, because sellers will only commit to deliver later at a premium.
The roll cost
A fund that wants steady exposure must sell each expiring contract and buy the next one, a Futures roll. In contango it sells low and buys high every time.
The most extreme US case came on April 20, 2020, when an oil glut and full storage sent the expiring May WTI contract to settle at minus $37.63 a barrel while later months stayed positive.
What it means for investors
Contango is the main reason futures-based commodity and volatility funds can trail the headline price they track by a wide margin over months. The VIX futures curve is usually in contango in calm markets, which is why long-volatility ETFs tend to lose value over time. Before buying such a fund, check how its holdings are rolled.