Contango.

In plain English

Contango describes a futures curve that slopes upward, with each further-out contract priced higher than the one before it and higher than today's spot price. The usual reason is the cost of carry: storing a physical commodity, insuring it, and tying up money until the delivery date all add to the later price. A fund that holds futures rather than the physical asset must roll from an expiring contract into a more expensive one, selling low and buying high each time. That roll cost drags on returns even when the spot price goes nowhere. It is one reason a commodity exchange-traded product can lag the commodity it tracks.

01Why it matters

Anyone holding a futures-based commodity fund can lose money to the shape of the curve alone, without the underlying price ever falling.

02The math, step by step

Spot oil is 70. The next month contract is 71 and the following month is 72. A fund rolling monthly sells at 71 and buys at 72, giving up about 1.4 percent each roll. Repeat that twelve times and the drag adds to roughly 17 percent over a year with the spot price unchanged.

Illustrative example. The amounts here are hypothetical, chosen to show how the math works, not real quoted rates or figures.

03What this is NOT

04Receipts

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