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Contango has a strange name, but the idea behind it isn't that hard to understand. If the price of a soon-to-expire futures contract is less than the price of a longer-dated futures contract, then the market is said to be in contango. If the reverse is true, then the market is in a state called backwardation.
The reason that contango is bad for certain ETFs is that if you're constantly paying higher prices every single month to replace your expiring contract with the next month's futures contract, you'll slowly but surely lose money in relation to the movement in the spot price of the commodity.
The best example is market volatility.
You can see contango in the volatility-tracking iPath S&P VIX ST Futures (VXX) and the related leveraged VelocityShares Daily 2x VIX ST (TVIX). Currently, the March VIX futures contract trades at a level of 16.39, but the corresponding April contract is at 16.91, more than 3% higher. As a result, ETFs that use a monthly roll-forward strategy currently face headwinds of 3 percentage points per month against their return.
But for inverse ETFs, contango can actually help. The VelocityShares Daily Inverse VIX ST ETN (XIV) has soared over the past year, largely due to low volatility. But because of its inverse orientation, contango has worked to the ETN's benefit, providing a boost to monthly returns.