The announcement explained that the market is said to be in “contango” when prices for exchange-traded futures contracts are higher in the distant than the nearer delivery months – as if the sale of a January contract took place at a lower price than a March contract. Contango can have a generally negative impact on index returns as the higher longer-term future prices move lower to the shorter-term prices; this potential convergence over time is often referred to as a negative “roll yield.
According to the announcement, for each commodity, the new index rolls from the expiring futures contract into the contract showing the least contango (or greatest backwardation), selecting from those specified contracts with nine months or fewer until expiration.
“With an enhancement that attempts to address the problematic effects of contango on index performance, the new index is designed to roll into contracts that result in the highest annualized roll yield relative to the current contract,” said Michael A. Petronella, President, Dow Jones Indexes, in the announcement.
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