Retail investors are sticking with AI trading, but appear to be becoming more cautious

Individual investors are not giving up on artificial intelligence trading. But as the market heads into the fall, we’re being selective and adding downside protection.

Investors are bracing for gains in individual technology stocks, using put options and inverse ETFs to hedge their risks, according to data from Vanda Research and Charles Schwab. A put option gives the holder the right to sell an asset at a specified price by a certain date. Inverse ETFs seek to move in the opposite direction of the index they are following.

“Retail investors are selectively trading on classic AI themes, but also adding downside protection through options and inverse ETFs,” Kaidi Meng, global equity strategist at Vanda, told CNBC in an emailed statement.

Meng said retail dynamics look very different now compared to before. “In the past, retail investors have bought with little question if there was a big decline,” he added. “But this year, retail investors have been more selective, either switching stocks quickly or buying the underlying stock while also buying protective puts.”

Meng said put purchases in the top 12 retail stocks for 2026 have nearly doubled compared to the first quarter, despite an overall decline in cash purchases of stocks since April. Even though outright stock purchases declined, put purchases rose from about 26% to 110% of net cash purchases. Net cash purchases refer to the amount an investor spends to purchase an asset plus the amount it sells.

The strategist said the growth of ETF strategies, including leveraged vehicles, is creating a different kind of risk-taking appetite than in the retail sector. “The inflows into ETFs indicate a trend of decreasing outright exposure, rather than just an increase in downside hedging,” Meng said.

Since mid-April, bulls and bears have been buying fewer tech ETFs, including leveraged funds, Vanda data shows. Meng noted that the activity of bullish ETFs has decreased by about 50%, while the activity of bearish ETFs has decreased by about 35%.

Overall, individual investors appear to be reducing long positions while seeking broader market exposure and increasing downside protection through individual stock puts and inverse ETFs, Meng said.

“This decline in long exposure could be the result of broader profit-taking following years of successful buy-the-moment strategies, or it could be a sign that retail investors are choosing to increase risk through more speculative stocks, leveraged ETFs, and betting sites,” he said.

Some still have a bullish view

However, the increased demand for protection does not mean that retail investors are generally bearish.

Charles Schwab data shows many investors remain long and positioning for further upside. Schwab investors continued to buy in July despite volatile market conditions, pushing the Schwab Trading Activity Index, known as STAX, up for the third straight month and to its highest level since January 2022.

The index stood at 59.80 in July, up from 59.12 in June. Schwab’s clients remain net buyers, with the brokerage expecting more than two buyers for every seller in July.

A recent report from the firm found that while many tech stocks are on the decline, traders are more willing to buy on the edge of stocks that are moving more sharply, and less interested in stocks that are moving within a range. Notably, Nvidia, a regular in STAX’s top five companies, disappeared from those rankings in July.

Joe Mazzola, head trading and derivatives strategist at Schwab, told CNBC that Schwab saw a small increase in put buying. Invesco QQQ Trust (QQQ) During the week of August 7th.

Mazzola said Schwab investors continue to sell puts on individual AI-related stocks. Nvidia, micron and sandiskbuy low-cost QQQ puts to hedge some of your broader technology exposure while taking advantage of rising option premiums.

But he said the recovery in hedging was significant but not dramatic.

“We’re trying to position ourselves for further upside by selling puts and buying calls,” he said. A call option gives an investor the right to buy a stock at a specified price by a certain date.

Hedge or directional bet

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

“Many forward-thinking investors continually evaluate both market opportunities and portfolio risks, adjusting their exposures and strategies as market conditions, investment themes, and their own objectives change,” Brian Coplin, head of advanced trading at Fidelity Investments, told CNBC via email.

For example, some people use options and other sophisticated strategies to manage portfolio risk or express market views based on expected price movements.

“Similarly, we continue to see interest in leveraged and inverse ETFs,” Coplin said. “While these products can be considered portfolio hedges, they are frequently used by active traders who place directional bets on expected market movements.”

According to Koplin, its ease of use could make it an attractive alternative to strategies involving margin borrowing or short selling.

But he also cautioned that investors should carefully consider their objectives, risks and generally short-term nature before trading these products.

“As forward-thinking investors evaluate portfolio construction, risk management, and more sophisticated trading strategies, education, research, and access to customizable tools can play a critical role in making informed and customized decisions and navigating evolving market opportunities,” said Coplin.