Difference between ETF and future prices

Options & Futures
1


I am confused on what is the difference between near_future, spot, and ETF prices in the graph?



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And, why does the ETF price not match the spot price, it is shifted downwards?

 

Lastly, why are roll returns calculated using the near_future price - ETF? Shouldn't roll returns be calculated using near_future - spot?

To my knowledge, roll returns are simply the returns based on the convergence of the future contract to the spot price at expiry. Thus, wouldn't the roll returns calculated using the ETF be incorrect because the ETF doesn't match the spot price?



This is also confusing because in the calculation of contango or backwardation, the near_future and spot prices are compared. 



For context, the code is below:



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Lastly, wouldn't futures contracts always converge to spot? Is the risk of spot-future arbitrage if the term structure flips between contango and backwardation? 



Thank you!



 

2

Hi David,

  1. So "near_future" is the "SI=F", the continuous contract of silver futures on COMEX. "Spot" is the current price at which silver can be bought or sold for immediate delivery. However, as it requires physical inventory, it is difficult and not feasible for retail traders. Therefore, we have an ETF, "SLV" (iShares Silver Trust), which closely tracks the silver spot.
  2. The price of a silver ETF often doesn't match the spot price of silver because of factors like management fees, operational costs (storage, insurance, etc.), market dynamics such as bid-ask spreads, and premiums or discounts to the net asset value (NAV), which typically cause the ETF price to be shifted downwards relative to the spot price. 
  3. Roll returns are calculated using ETF price because ETFs are easily tradable and offer a way to gain exposure to commodities without dealing with the complexities of physical delivery or spot market transactions. However, since ETFs typically trade at a discount to the spot price due to various costs and fees, using ETFs for contango and backwardation calculation may underestimate the true convergence between futures and spot prices. Hence, comparing futures to the spot price is a standard. That is why it is used to assess market conditions like contango and backwardation.
  4. Yes, futures contracts are expected to converge to the spot price by expiration. However, there is a risk in spot-future arbitrage when the term structure flips between contango and backwardation. Suppose the market for a commodity is in contango due to high storage costs and expectations of future supply. A sudden supply disruption causes immediate demand to spike, flipping the market into backwardation. Arbitragers who were shorting futures expecting them to converge to the spot price might find themselves in a loss-making position as futures prices rise quickly to reflect the new scarcity, outpacing the rise in the spot price. 
Hope this helps!