Spot vs. Futures
Present Value: Why Spot Commodity ETFs are Superior
In 2004, two Yale academics published what Reuters columnist John Kemp later termed “one of the most influential research papers in 21st century finance”. Gary Gorton and Geert Rouwenhorst’s Facts and Fantasies About Commodity Futures laid the intellectual groundwork for billions of dollars of pension fund money to enter global commodity markets.
Much of their case for investing in a basket of commodity futures revolved around the tendency at the time for many commodity curves to exhibit backwardation—a situation where futures prices are below spot prices. Backwardation, they argued, allowed holders of commodity futures to capitalize on a hefty risk premium. This thinking had some considerable historical backing—they noted that “Keynes’ (1930) and Hicks’ (1939) theory of normal backwardation postulated that the risk premium would on average accrue to the buyers of futures.”
How would this work in practice, though? Here’s what Gorton and Rouwenhorst suggested:
Do speculators have to hold the futures contract until expiration? The answer is no. Over time, as the maturity date of the futures contract draws close, the futures price will start to approach the spot price of a commodity. At maturity, the futures contract will become equivalent to a spot contract, and the futures price will equal the spot price. If futures prices were initially set below the expected future spot price, the futures price will gradually increase over time, rewarding the long position.
Contango Helped Ruin the Commodity Dance
A central problem with Gorton and Rouwenhorst’s case for commodity futures is that, paradoxically, it became too popular. Pension funds, university endowments and other investors rushed into commodities in search of return and diversification—especially after the bursting of the U.S. housing bubble.
All this demand for commodity futures pushed curves into contango---great for sellers of commodities, but painful for the longs. The cost of carrying commodity futures (rolling them over) became prohibitive. In the end, this factor plus a crash in spot prices in 2008 burned many late investors.
The United States Oil Fund (USO) provides a great case study in how a commodity ETF that owns futures can meaningfully diverge from the underlying spot commodity. USO does not own physical barrels of oil. Rather, it owns near-dated futures on West Texas Intermediate crude (WTI), which it rolls as they near expiry.
As you can see in the above five and ten-year performance charts, USO and WTI could not be more different. In the last five years, USO has trounced WTI, because the oil curve has been in backwardation (spot higher than futures). Going back ten years, however, USO is only up a meagre 13.7%, compared to 109.7% for spot WTI. The reason? The WTI curve was in a steep contango in the pandemic. Rolling futures contracts became very expensive for the ETF, eating away at returns.
Why We Stick with Spot over Futures
Here at Kurv, one reason we own options on gold, silver, and copper ETFs is precisely to avoid the contango cost our investors would bear if we owned commodity futures ETFs instead. Now, if gold, silver or copper markets do enter backwardation, presumably such a development will be driven by a near-term shortage, so our investors will still benefit.
As recently detailed, we remain bullish on metals. In expressing that bullish view through portfolio construction, our goal is to see that our ETFs rise if metal prices do continue to climb. Commodity futures could impede that goal, so we’re happy to stock with spot ETFs instead.
1099 vs. K-1
For US investors, both options and futures on commodities, like gold, silver, and copper, are generally taxed under Section 1256 with a rate of 60% long-term capital gains rate / 40% short-term capital gains rate. This could be more advantageous for some investors as it is lower than several high ordinary income tax brackets, as well as the collectible rate used when holding physical gold or silver.
Traditional commodity ETFs, using futures or physicals, are structured as 1933 Act funds, which issue K-1s. Many investors find K-1s a headache, as they usually arrive close to the tax filing deadline.
However, at Kurv, our commodities income ETFs are structured as 1940 Act funds that issue 1099s. These are typically delivered to investors in a much timelier fashion.
Important Information:
The foregoing is general market and economic commentary prepared by Kurv investment professionals as of 03/10/2026. The commentary is neither to be construed as general investment advice nor personalized investment advice. Our commentary is subject to change based upon our views of market, economic, political and related factors. We are under no obligation to provide updated commentary if our views change. To the extent the commentary covers market segments, market sectors, industries, commodities or other securities please note that Kurv professionals may effect transactions in such market segments, market sectors, industries, and commodities or other securities which presents a conflict of interest. All Kurv investment professionals are subject to the firm’s Code of Ethics policy.
For more information on Kurv Investment Management please visit www.kurvinvest.com.
