Figuring out what investors are really thinking when they trade ETFs is a bit like reading tea leaves. According to Ryan Lee, Senior Vice President of Product and Strategy at Direxion (JJP), the activity you see reflects a mix of speculation and hedging—and sometimes both from the same person.

"Due to the nature of the ETF wrapper, it is impossible to pin down exact end-use cases of trading behaviors," Lee told MarketDash. "Active traders think bi-directionally… an opportunity to buy a bear fund when the trader believes the underlying asset will dip, may be just as attractive to them as buying a bull fund when they think it will rise." At the same time, he added, "savvy traders are often keen to hedge a position that they have in their portfolio."

So, some people are swinging for the fences, others are buying insurance. And in one of the market's fastest-growing corners, it's almost entirely retail traders doing the swinging and the insuring.

The Retail-Powered Engine

Leveraged single-stock ETFs are a retail story. A recent report, citing a study co-authored by Direxion, Vanda Research and The Compound Insights, found that individual investors account for almost 90% of the trading in these funds. That's a stunning figure for products that only launched in late 2022. Despite their youth, they made up 8% of total U.S. exchange trading volume last year.

The growth is explosive. Data shows 355 leveraged single-stock ETFs are now listed in the U.S., including 275 launched since just January 2025. Trading volume in this segment is growing at a 29% annual rate, which outpaces both stocks and options. Retail isn't just dabbling here; they're powering the whole thing.

Do These ETFs Move the Market?

When a niche product makes up 8% of all exchange trading, people start to wonder if it's influencing the underlying stocks. Does all this leveraged betting on, say, Tesla (TSLA), actually push Tesla's stock price around?

Lee pushes back hard on that idea. He explains that Direxion's single-stock ETFs get their exposure through swaps with major banks. This means the ETF's price moves in lockstep with the underlying stock, multiplied by the leverage factor (like 2x or -1x), but the swap itself is separate from the equity market. "The underlying stock will always drive price discovery for the ETF," Lee said. "A bank's swap is entirely exogenous to the underlying equity." In simpler terms: the ETF follows the stock, not the other way around.

The April Stress Test and the Liquidity Loop

The real test came during the tariff-driven selloff last April—dubbed "Liberation Day" by some. The study highlighted this as the category's first major stress test. At times, retail trades in leveraged single-stock ETFs accounted for up to 40% of total market activity. That's a huge number.

You might think that much leveraged activity in a panic would make things worse. Lee argues the opposite happened: it added liquidity. "Liquidity begets liquidity," he said. He noted that leveraged long ETFs saw inflows as traders bought the dip, while inverse funds (the bearish ones) experienced outflows as people cashed in their downside hedges. Money was moving, but it was moving in a way that provided bids and offers. The classic fear is that leveraged products amplify volatility; Lee's view is that in this case, they helped absorb it.

Is This a Bubble or a New Normal?

With new fund launches accelerating, some analysts warn of saturation. Lee isn't seeing it. "The only answer to if a market is over saturated is if investor and trader interest has dried up," he said. "Thus far, we continue to see demand for new and innovative forms of leveraged ETFs."

He also makes a compelling point: these funds have become a real-time barometer of retail sentiment. Direxion's largest single-stock leveraged products are tied to the AI stars that have dominated retail chatter—names like Tesla, Micron Technology (MU), Meta Platforms (META), Palantir Technologies (PLTR) and Nvidia (NVDA).

As the AI theme evolves, Lee expects traders to follow the money. With memory emerging as a bottleneck in the AI buildout, he pointed to strong growth in products like the Direxion Daily 2X Micron ETF (MUU) and other semiconductor-linked funds. The ETFs aren't just tools; they're signals showing where retail attention and conviction are flowing.

Looking ahead, even to a potential sharp correction, Lee believes traders will keep using these products. "What we do know is that traders will use leveraged and inverse ETFs to express their views," he said. And in times when market liquidity often dries up, he argues, their participation "should certainly be additive."

Whether that added liquidity proves to be a stabilizing force in a future crash is still an open question. But for now, the message from the data is clear: in the world of leveraged single-stock ETFs, retail traders aren't just participants. They are the market.