Backwardation.
In plain English
Backwardation describes a futures curve that slopes downward, with contracts for later delivery priced below today's spot price, usually because buyers want the physical asset immediately. Tight supply, low inventories, or a disruption can push the near contract above the far ones, because holding the actual commodity carries a benefit that traders call a convenience yield. A fund rolling futures in backwardation sells the expiring contract high and buys the next one cheaper, which adds to return rather than subtracting from it. The curve can flip between backwardation and contango as inventories build or drain. Neither shape is a forecast of the spot price.
01Why it matters
The direction of the curve decides whether rolling futures quietly adds to a return or quietly eats it, which is a bigger factor in commodity funds than most holders expect.
02The math, step by step
Spot copper is 4.00 a pound, the next month contract is 3.96, and the one after is 3.92. Rolling monthly means selling at 3.96 and buying at 3.92, a gain of about 1 percent per roll. Over twelve rolls that is roughly 12 percent of tailwind with the spot price flat.
Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.
03What this is NOT
Backwardation is the mirror image of contango, not a variation of it. In contango, later contracts cost more and rolling loses money. In backwardation, later contracts cost less and rolling gains. Same curve, opposite slope, opposite effect on a fund.
04Receipts
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Plain-English answers from our glossary. Receipts included. Never advice.
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