Canadian Securities Course (CSC) Level 2 Practice Exam

What effect does rolling over contracts have on Futures-based Commodity exchange traded funds?

1. Results in a roll yield gain

2. Causes a decrease in management expenses

3. Results in a roll yield loss

4. Increases leverage ratio

The correct answer is: Results in a roll yield loss

Rolling over contracts in futures-based commodity exchange-traded funds (ETFs) typically leads to a roll yield loss. This occurs because rolling over contracts involves selling expiring futures contracts and buying new ones with later expiration dates. If the market is in contango, where futures prices are higher than the spot price, this rollover results in selling low and buying high, leading to a loss in the roll yield. This phenomenon can have a significant impact on overall returns for investors in these funds, particularly if the fund frequently rolls over contracts. By understanding this mechanism, investors can better assess the potential performance of futures-based commodity ETFs based on market conditions. In contrast, the other options discussed do not accurately reflect the typical outcomes associated with the rollover of futures contracts.