Retail investors haven't abandoned the artificial intelligence trade, but as autumn approaches, stock selection is becoming increasingly discerning, with a growing emphasis on downside protection tools. Data from Vanda Research and Charles Schwab reveals that investors are utilizing put options and inverse ETFs to hedge risks while selectively maintaining positions in certain tech stocks to capture upside gains. Put options grant holders the right to sell an asset at a set price before a specified date, while inverse ETFs move opposite to the performance of their benchmark index.

"Retail investors remain selectively engaged in traditional AI themes while simultaneously enhancing their downside protection through options and inverse ETFs," noted Marco Iachini, Vanda's global equity strategist, via email. Iachini highlighted that current retail capital flows differ drastically from previous years. "In the past, significant market pullbacks would prompt retail investors to buy the dip almost reflexively. This year, however, their approach is much more tactical: either swiftly rotating between different stocks or purchasing protective puts alongside their long positions in equities."

Iachini stated that despite an overall decline in direct cash purchases of stocks, put option buying volume for the top 12 retail-favored stocks of 2026 has nearly doubled since April compared to the first quarter. The ratio of put buying to net cash purchases has surged from roughly 26% to 110%, even as direct share purchases have contracted. Net cash purchases refer to the total cash used to acquire assets minus the cash recovered from selling assets.

The strategist also noted that the expansion of ETF strategies, including leveraged products, has fostered a new risk profile among retail investors. "The ETF inflows reflect a reduction in direct stock exposure rather than merely an increase in hedging activity." Vanda data indicates that since mid-April, buying activity for both bullish and bearish tech ETFs, including leveraged funds, has declined. Iachini pointed out that bullish ETF inflows have dropped significantly by around 50%, while bearish ETF inflows have fallen by approximately 35%.

Iachini concluded that overall, retail investors are increasing downside protection through single-stock puts and broad-market inverse ETFs while trimming their long positions. "The contraction in long exposure partly stems from widespread profit-taking after years of lucrative dip-buying strategies; it could also signal a shift toward higher-risk instruments such as speculative stocks, leveraged ETFs, and betting platforms."

Still, the rising demand for protective hedges does not indicate a wholesale bearish turn among retail investors. According to Charles Schwab, a substantial number of investors continue buying, betting on further upside. Despite July's market turbulence, Schwab clients maintained net buying, with the Schwab Trading Activity Index (STAX) rising for the third consecutive month to its highest level since January 2022. The index recorded 59.80 in July, up from 59.12 in June. Throughout July, Schwab clients remained net purchasers, with more than two buyers for every seller in the market. A press release noted that many traders preferred buying pullbacks in volatile tech stocks while showing little interest in range-bound names.

Notably, Nvidia, which frequently appeared in the STAX top five, was absent from the list in July. Joe Mazzola, head of trading and derivatives strategy at Charles Schwab, revealed that put option buying on the QQQ (Nasdaq-100 ETF) saw a slight uptick during the week of August 7. Mazzola explained that Schwab clients continue selling put options on AI-related stocks like Nvidia, Micron, and SanDisk to collect elevated option premiums, while simultaneously buying cheaper QQQ puts to hedge their broader tech sector exposure. He clarified, however, that while hedging activity has increased, it has not reached extreme levels. "Investors are selling puts and buying calls, still positioning for further market gains." Call options grant investors the right to buy a stock at a predetermined price before expiration.

Inverse and leveraged ETFs can serve as hedges, but they are also frequently used for directional bets on market movements. Brian Coplin, senior trading manager at Fidelity Investments, explained in an email: "Many sophisticated investors continually evaluate market opportunities and portfolio risks, adjusting their holdings and strategies based on market conditions, investment themes, and their own objectives. For example, some use options or other advanced tools to manage portfolio risk or to express their market outlook based on price expectations."

Coplin added: "Similarly, leveraged and inverse ETFs remain highly popular. While they can function as portfolio hedges, active traders primarily use them to make directional calls on market trends." He noted that these products have a lower barrier to entry compared to margin trading or direct shorting, making them attractive to some investors. However, he warned that traders must thoroughly understand the products' objectives, risks, and their suitability primarily for short-term trading. Coplin stated: "For seasoned investors constructing portfolios, managing risk, or researching complex trading strategies, investment education, research reports, and customizable tools help them make rational decisions suited to their circumstances, navigating an ever-changing landscape of market opportunities."