I exploit the leveraged exchange-traded funds' (ETFs') primary market to measure aggregate, uninformed, gambling-like demand, that is, speculation sentiment. The leveraged ETFs' primary market is a novel setting that provides observable arbitrage activity attributed to correcting mispricing between ETFs' shares and their underlying assets. The arbitrage activity proxies for the magnitude and direction of speculative demand shocks and I use it to form the Speculation Sentiment Index. The measure negatively relates to contemporaneous market returns (e.g., it is bullish in down markets) and negatively predicts returns. The results are consistent with speculation sentiment causing market-wide price distortions that later reverse.

Keywords: investor sentiment, non-fundamental demand, return predictability, leveraged exchange-traded fund

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