Roll effect

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In the case of certain certificates on raw materials, the rolling effect is a distortion between the certificate price and the raw material price, which arises when the corresponding certificate is not related to the price on the cash market but to commodity futures . Specifically, one speaks of a roll gain or roll loss .

How it works using the example of a raw material ETC

Starting position

If the issuer of a raw material certificate wants to secure it with the corresponding raw material, he could physically buy and store the raw material. Among other things, this would incur storage costs. For this reason, such certificates are instead often backed by commodity futures contracts, which establish a claim to delivery of the raw material at a certain point in time in the future, and are also based on this in the value calculation. If these futures are more expensive than the corresponding raw material at the current spot price, for example because market participants are expecting a rising price in the future, we are talking about a contango situation. On the other hand, if the futures are cheaper than the commodity on the cash market, investors speak of backwardation .

The issuer of a continuous commodity certificate (often "open-end certificate") that has backed it with a future, however, still has no interest in an actual delivery when the future expires, among other things because otherwise the named storage costs would be incurred. The issuer therefore sells the underlying futures shortly before the delivery date and purchases new futures on the same commodity, which justify a further future delivery claim: The futures are "rolled".

Rolling process

Naturally, the price of a future approaches the price on the cash market the closer the delivery date and thus the last possible roll date approaches. A roll loss ultimately arises when the selling price of the expiring future - in practice usually almost the spot price - at the latest by the roll date compared to the purchase price of the same future on the previous roll date on which it was acquired, developed worse than the spot price between did these two dates. A roll profit , on the other hand, arises if this price develops better.

The actual roll process itself, i.e. the change from one future to the next, neither generates a profit nor a loss. It may be the case that, for example, a lower price is achieved for expiring futures than must be paid for new futures, which means that if the budget remains the same, the commodity certificate is backed by futures to a lesser extent after "rolling". However, in such a situation, these new futures also have a higher value at the rollover date, so that - apart from marginal transaction costs (“rollover fees”) - there is no significant change in value at the moment of the rollover process.

Effects

Deep pump at a Texan oil well - certificates on the oil price are regularly affected by rolling effects

In practice, investors in a commodity certificate backed by futures can only make a profit if the price of the commodity in a contango situation rises even more, or in the case of backwardation, falls more slowly than the prices on the commodity futures market and thus the assessment of the expect active market participants there.

The rolling effect means that speculators who are not interested in actual delivery and storage can only participate positively to a limited extent in the development of raw material prices, namely only to the extent that they trump the assessment of the players on the commodity futures market. The alternative would be that speculators would find market players who would place a corresponding counter-bet directly on the spot price so that the raw material itself does not have to be stored, which, however, is unusual in the raw material market and therefore mostly not possible. In practice, even with a positive development of the commodity price on the cash market, speculators with commodity certificates can suffer losses if, in a contango situation, a possible price increase has already been fully anticipated by surcharges on futures on the commodity futures market. If the investor makes a profit in the contango, this is not as strong as the pure development of the spot price. If the spot price falls during a contango situation, the losses are even higher than average. If the spot price falls during a backwardation situation, profits are theoretically possible if the price loss does not occur as strongly as is implied by the prices on the commodity futures market ("roll profit") - although the latter rarely occurs on the commodities market.

It is often rumored that rollover effects could be avoided if investments are made in ETCs or maturity certificates that relate to a specific fixed futures contract, usually in the relatively distant future. Although there is no “rolling” in such a constellation, the “rolling effect” in the figurative sense still occurs practically unchanged. Here, too, the investor has to beat the market assessment of the players on the commodity futures market, since long-term futures are also only sold with corresponding surcharges or discounts in accordance with general market opinion. Only the “rollover fees” are saved.

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