Episode Summary

Many Canadian investors seek direct commodity exposure through futures-based ETFs, such as oil funds, to avoid storing physical assets. However, these funds can suffer from a devastating mismatch where the underlying spot commodity rises, yet the ETF loses a substantial portion of its value. This episode explains the mechanics of this phenomenon, which is driven by the structural reality of "rolling" expiring futures contracts. In a normal market structure known as contango—where futures trade above spot due to storage and financing costs—a fund must continuously sell low and buy high, creating a severe and compounding drag on returns. Conversely, we examine backwardation, where tight immediate supply pushes futures below spot, temporarily turning the roll cost into a posit ...