Roll yield

The roll yield is the yield that a futures investor captures when their futures contract converges to the spot price; in a backwardated futures market the price rolls up to the spot price, so the roll yield is positive, whereas when the market is in contango the price rolls down to the spot price, so the roll yield is negative. The spot price can stay constant, but the investor will still earn returns from buying discounted futures contracts, which continuously roll up to the constant spot price.

For example, suppose the spot price of oil is $58 and the market is inverted because inventories are relatively low. This means the first futures price might be at $57 and the next contract at $56. You go long the front contract as described above. Now suppose a few weeks pass and nothing happens to the spot price. The futures contract you own moves toward the spot price as delivery approaches, and we can assume the spread between the futures stays at a dollar. You sell your maturing futures near the $58 spot price and buy the next future for around $57. Note that in an inverted market you make money from the roll yield even if commodity prices remain unchanged.

Roll yield can have a strong impact on the return of futures trading. The contango exhibited in Crude Oil in 2009 explains the discrepancy between the headline spot price increase (bottoming at $35 and topping $80 in the year) and the various tradeable instruments for Crude Oil (such as rolled contracts or longer-dated futures contracts) showing a much lower price increase, because of the strong negative roll yield.^[1] The USO ETF (using futures contracts) also failed to replicate Crude Oil's spot price performance.