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Contango and backwardation are critical concepts for understanding how futures ETFs work and why they might differ in performance from the underlying futures. **Contango** occurs when the futures prices are higher than the spot price. This is often seen in markets where it costs money to store the underlying asset, like oil. In a contango market, the ETF is essentially buying high and selling low as it rolls its contracts, which erodes the value of the ETF over time. **Backwardation**, on the other hand, is when the futures prices are lower than the spot price. In this scenario, the ETF benefits from rolling its contracts because it's buying low and selling high, which can boost its performance. Understanding these terms is vital to grasping the nuances of futures ETF arbitrage. It helps in assessing the potential profitability of any arbitrage strategy.
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