ETF Negative Roll Yield

I have a quick question about the ETF Roll Yield. As we all know commodity ETF’s have struggled with contango (spot price is below futures prices on the term structure). Look at an ETF like USO which because of the contango in WTI has had negative roll yield even as WTI prices have rebounded since 2008.

Here is my question. Why does the roll yield even occur? If an ETF like the USO is long the spot why does it have to roll into a higher price contract? Wouldn’t the futures price and the spot eventually converge by the time the roll occurs? The future price is higher than the spot in a contango wouldn’t the spot have to move higher to reach the futures price? I mean the futures can decline to the spot but I don’t see how this affect you if your long the spot.

If the USO isn’t long the spot but further out oil contracts, what guarantees that futures price will converge to the spot in a contango curve? So contango doesn’t have to necessarily be a bad thing for a long commodity investor/etf.

Answer

The futures price goes to the spot price as time to maturity declines, not vice-versa. The difference is referred to as basis. That's not really what roll yield is about though. The roll yield aspect is that as the contracts the ETF holds are expiring, they are close to the spot price. However, the next futures contract's price is higher than the price of the futures contract you're in due to the effect of contango. So if you were to sell out of the closest futures contract to buy the next one, it would cost more to achieve the same exposure it had before.