Roll Cost

The gain or loss incurred when a futures position is closed and reopened in the next contract month — a drag in contango markets and a benefit in backwardation.

Futures contracts have expiration dates, so any investor maintaining continuous exposure to a commodity must periodically "roll" their position — closing the expiring contract and opening a new one with a later expiration. The roll cost (or roll yield) is the difference in price between the two contracts at the time of rolling.

In a contango market (where later contracts are more expensive), every roll involves selling cheaper near-term contracts and buying more expensive far-dated ones, creating a continuous drag on returns. A commodity ETF tracking crude oil, for example, might underperform the spot price by 5–15% annually purely due to roll costs during periods of steep contango. Over years, this drag compounds dramatically, which is why naive comparisons of commodity ETF returns to spot commodity charts can be very misleading.

In backwardation (where later contracts are cheaper), the roll generates a positive yield — selling more expensive near-term contracts and buying cheaper longer-dated ones. Historically, commodities have spent more time in contango than backwardation on average, which is one reason long-only commodity futures exposure has been a poor investment over most multi-decade periods, even when spot prices have risen. Roll cost is an essential concept for anyone investing in commodity futures products.

This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.