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.

My questions:

  1. 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?
  2. 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
  3. 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?
  • 2
    $\begingroup$ The article you linked to seems overly pedantic. Of course, the reason that a constant-maturity strategy loses money in a contangoed market is because the futures drop in value over time. This is what practitioners and academics mean by roll yield - the appreciation/depreciation of a contract assuming that the curve remains constant. Saying that the depreciation is "not due to the daily roll" is only true if what you mean by "daily roll" is the constant selling of the near contract and buying of the far contract. But that's not what people mean by "daily roll". $\endgroup$ Commented Jul 12, 2017 at 13:14
  • $\begingroup$ I have found sixfigureinvesting.com a good source of information about VIX trading. In this article I agree there is a certain amount of hairsplitting, and it all turns on the question of exactly what we mean by "the daily roll" and how we calculate things. $\endgroup$
    – nbbo2
    Commented Jul 12, 2017 at 14:15
  • 1
    $\begingroup$ The misconception he criticizes is that the loss is incurred in one lump at the moment you sell one contract and buy another. The truth, he explains, is that the loss is incurred gradually as the futures prices drop over time. That's all. $\endgroup$
    – nbbo2
    Commented Jul 12, 2017 at 15:23
  • $\begingroup$ 1. Does this mean that for most products tracking futures that are in contango will lose value over time because of that effect? 2. What about my question for #3? $\endgroup$
    – qwer
    Commented Jul 16, 2017 at 18:11


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