Precious Metals, Corn, Coffee, and Sugar Sloping Up

By Commodity HQ  FEB 24, 2014 11:42 AM

These four commodities are in contango, meaning near-month futures are cheaper than those expiring further into the future.

 


Contango is the process by which near-month futures are cheaper than those expiring further into the future, creating an upward sloping curve for future prices over time. It usually stems from the cost of storing commodities prior to their sale, though a futures curve can also reflect market expectations of where a commodity is heading. Though contango often comes handcuffed to negative connotations, it typically is not a problem for traders and investors who are aware of it.

Below, we outline some of the biggest commodities currently sitting in contango:

Watch Your ETFs

The prevalence of futures-based ETFs has surged in recent years, as a number of investors have utilized these instruments to add commodity exposure. Contango can be devastating for futures ETFs in the long term, as a roll decay can hurt the price each month. The roll decay occurs when an ETF rolls out of an expiring position and into a new contract that is more expensive (caused by contango), causing the fund to instantly lose value.

A number of ETFs have employed unique strategies to circumvent this issue, but the majority of futures-based products will fall prey to contango. Be sure to take a look under the hood of your ETF to make sure you are on top of the pesky issues that contango can create.


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Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
No positions in stocks mentioned.