I am trying to wrap my head around how ETFs that track futures work (whether its USO tracking WTI futures or VXX tracking VIX futures).
I have read online about how for normal contango environments, ETFs tracking those futures will lose value over time because of the roll yield (when the nearby futures expires, the fund needs to buy the next month future in order to maintain same exposure, but for normal contango environments, it means that price is generally higher). ETF Negative Roll Yield
However, the article below seems to demonstrate that for the VIX at least, that is not the case. https://sixfigureinvesting.com/2016/09/the-cost-of-contango-its-not-the-daily-roll/
In his post, he attributes the loss of the VXX ETF over time not to the actual rolling of the index, but due to the fact that as time goes closer to maturity, the contract will slide down that contago curve, and that movement is the thing that drives price declines.
- In his toy example, if he keeps the term structure the same from day to day, the roll cost doesnt factor into the overall value of his Nov/Dec aggregate because the number of contract changes but the value does not. This seems not right? If the ETF is targeting some constant time to maturity exposure, because the overall value split by month is now 84%/16% vs 88%/12%, the value weighted time to maturity will have changed from day to day. In my mind, dont most funds target this constant maturity? Like if I want constant 30 day exposure. Starting from day 0, I buy nearby expiring 30 days from today. Day 1, I now need to shift 1/30 in value from the nearby contract to the 2nd nearby (which say is now 59 days to expiry), so that my value weighted time to maturity remains at 30 days?
- If say I were to be long SPY futures, if I simply wanted to roll my exposure from one contract to the next as they expired, my wanting to buy 1 contract each time seems like it will incur a roll cost because I want a constant 1 contract exposure
- If my understanding of ETFs targeting specific constant maturity is correct, how and when do these ETFs decide to roll their exposures? Ie do they do it at end of day? Also I would imagine, it may be difficult to maintain exact constant maturity because you cant have fractional future contracts, so what error tolerance do they allow?