Retail investors stick with AI trade but appear more cautious

Retail investors aren’t giving up on the artificial intelligence trade. But they are getting selective and adding downside protection as markets head into the fall.

Investors are using put options and inverse ETFs to hedge risk while still positioning for upside in individual technology stocks, according to data from Vanda Research and Charles Schwab. Put options give the holder the right to sell an asset at a stated price by a certain date. Inverse ETFs aim to move in the opposite direction from the index they’re following.

“Retail investors are selectively trading in the classic AI theme but also adding downside protection via options and inverse ETFs,” Vanda’s global equity strategist Kaidi Meng told CNBC in an emailed statement.

Retail flows look very different now compared with prior years, Meng said. “Previously, retail bought any major dips almost without question. However, this year, we are seeing a more selective retail investor that is either switching between stocks quickly or buying underlying stocks while also buying protective puts,” she added.

​Since April, Meng said put buying of the top 12 retail-favored stocks in 2026 has almost doubled versus the first quarter, despite an overall reduction in cash purchases of stocks. Put buying went up to 110% from about 26% of net cash buying, even as outright stock purchases have declined. Net cash buying refers to the amount investors spend on purchasing assets versus the amount they sell.

The strategist said growth of ETF strategies, including levered vehicles, has led to a different kind of risk-taking appetite from retail cohorts. “Flows into ETFs signal a trend of reduced outright exposure, rather than just an uptick in downside hedges,” Meng said.

Vanda’s data shows that since mid-April, buying of both bullish and bearish tech ETFs, including leveraged funds, has declined. Bullish activity fell sharply, down about 50%, Meng pointed out, compared with a roughly 35% decline for bearish ETFs.

Overall, Meng said retail investors appear to be adding downside protection through puts on individual stocks and inverse ETFs for broader market exposure, while also cutting their long positions.

“This reduction in long exposure may be a function of broader profit-taking after years of successful buy-the-dip strategies, or this could be a sign of retail investors choosing to take increased risk via more speculative stocks, levered ETFs, and betting sites,” she said.

Some are still bullish underneath

The increased demand for protection, however, doesn’t mean retail investors have broadly turned bearish.

Data from Charles Schwab show that many investors are still buying and positioning for further upside. Schwab investors continued to buy in July despite a choppy market backdrop, lifting the Schwab Trading Activity Index, known as STAX, for a third straight month and bringing it to its highest level since January 2022.

The index rose to 59.80 in July from 59.12 in June. Schwab clients remained net buyers, with the brokerage firm seeing more than two buyers for every seller in July.

A recent report by the firm showed that as many tech stocks pulled back, traders appeared more willing to buy dips in names with sharper moves, while showing less interest in stocks that remained rangebound. Notably, Nvidia, which was regularly among the top five names in STAX, was absent from those rankings in July.

Joe Mazzola, Schwab’s head trading and derivatives strategist, told CNBC the firm saw a modest pickup in put buying on the Invesco QQQ Trust (QQQ) during the week of Aug. 7. 

Mazzola said Schwab investors were continuing to sell puts on individual AI-linked stocks such as Nvidia, Micron and Sandisk, taking advantage of elevated option premiums, while buying lower-cost QQQ puts to hedge some of their broader tech exposure.

But he said while the hedging pickup is noticeable, it is not dramatic.

“Put selling and call buying, so they’re trying to position themselves for an additional rally,” he said. A call option gives the investor the right to buy a stock at a specified price by a certain date.

A hedge or directional bet

Inverse and leveraged ETFs can be used to hedge risk, but traders can also use them to make directional bets.

“Many advanced investors continuously evaluate both market opportunities and portfolio risk, adjusting exposures and strategies as market conditions, investment themes, and their own objectives evolve,” Bryan Koplin, head of advanced trading at Fidelity Investments told CNBC in an email.

For example, some may use options or other advanced strategies to help manage portfolio risk or express a market view based on expected price movements.

“Similarly, we’re also seeing continued interest in leveraged and inverse ETFs,” Koplin said. “While these products could be viewed as portfolio hedging, they are frequently used by active traders to make directional bets on expected market movements.”

According to Koplin, their ease of use can make them an attractive alternative to strategies involving margin borrowing or short selling.

But he also warns that investors should carefully consider the objectives, risks and generally short-term nature of these products before trading them.

“As advanced investors evaluate portfolio construction, risk management, and more sophisticated trading strategies,” Koplin said, “access to education, research, and customizable tools can play an important role in helping them make tailored, informed decisions and navigate evolving market opportunities.”