Prof G Markets · Tuesday, August 4, 2026
Michael Green explains how leveraged ETFs, similar to Leo's fund, contribute to volatility in sectors like semiconductors due to daily rebalancing and the "volatility drag" phenomenon. He notes that retail investors are often drawn to these products seeking quick gains, leading to potential catastrophic losses.
“Leveraged ETFs carry the same characteristics as Leo's portfolio, which is obviously running at 4X leverage.”
“And this is where volatility creates a phenomenon called volatility drag.”
“But if you do the exact same math for what happens now if I fall 10%, the compounding effect of that leverage and the need to rebalance it creates the conditions that cause sorts of catastrophic losses.”
“At 3X leverage, running the level of volatility we were experiencing in the semiconductor space, as of April, May, you would need a return in excess of 170% a year in order to simply break even on the volatility drag.”