Retail investors aren't entirely giving up on AI trade, but they appear more cautious
POLAND - 2025/02/24: In this photo illustration, an Artificial Intelligence (AI) logo is displayed on a smartphone with an Artificial Intelligence (AI) symbols on the background. (Photo Illustration by Omar Marques/SOPA Images/LightRocket via Getty Images)
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.