The rising tide of artificial intelligence was once lifting all boats in the tech trade. But three years into the boom, the waters are getting choppier. Investors are taking a show-me attitude. For financial advisors, limiting clients' downside risk and being mindful of volatility is now as important as capturing the upside.
There are a few ways to pivot. Two I suggest: Investors can either turn to a family of tech-focused buffer ETFs, or embark on options strategies that actually use the volatility for their benefit.
The down days and volatility in 2026 are real. The Nasdaq sold off 3% one day in mid-June -- the second time this year the index has had a single-day pullback of that magnitude. By contrast, there were no 3% down days for the Nasdaq in 2023, the first year real AI euphoria hit the markets after the launch of ChatGPT in late 2022.
Investors then, and for a long time after, were willing to suspend disbelief and bet on all things tech. The same goes for volatility, which is up this year. Annualized volatility on the Nasdaq 100 has run at 21% in the first half of 2026, against 18% for all of 2023.
Investors should be prepared now for a bumpy road ahead. After hundreds of billions of dollars of capital spending on AI infrastructure, investors are demanding to see returns on that spending -- with limited results so far.
Another factor impacting tech: A slew of massive IPOs hitting the markets, including SpaceX, is siphoning demand from existing tech holdings. And while rate cuts, which help long-duration assets like technology, were thought to be a sure thing at the start of the year, persistent inflation and a more hawkish Fed now have futures pointing to rate hikes instead. The June Federal Open Market Committee dot plot showed nine of 19 participants expecting at least one hike by year-end.
Here are two ways to protect against further downside in tech stocks:
Buffer ETFs. One simple way to manage risk is via defined-outcome, also known as buffer ETFs, which use options to deliver a defined cap and buffer on the Nasdaq 100 over one-year periods. Here I'll discuss the Innovator family of buffer ETFs. I haven't used these and have no business relationship with them, but am considering them. The Power Buffer Nasdaq 100 $(NJUL)$ for the July reset gives a 15% downside cushion with roughly a 14-22% upside cap -- the right balance for most clients.
The lighter buffer series gives less protection (9%) for a higher cap of 18% to 24%, which is best for investors with greater risk appetite. The firm's "ultra" buffer series absorbs losses between 5% and 35% -- protecting against catastrophic drawdowns at the cost of taking the first 5% of any loss -- with a smaller cap of about 8% to 12%. It is best suited for investors near retirement who can't stomach a major drawdown.
The timing is opportune for investors looking to allocate to NJUL. The terms for the ETF will be unveiled on July 1 for the year ahead, and the elevated volatility may lead to better terms by providing richer options-related income the vehicle is reliant upon.
Selling puts. Investors would be wise to focus on the technology components subsector, which has emerged as the star of the tech trade in 2026. Memory and storage are in short supply. After announcing blowout earnings in June -- beating Wall Street estimates by 16% on revenue and 23% on earnings per share -- Micron CEO Sanjay Mehrotra noted that high-bandwidth memory supply is sold out through calendar year 2027, with overall industry supply tightness expected to persist into 2028.
Shares of Micron and Sandisk have rallied roughly 280% and over 700% year to date, respectively. Yet valuations remain modest considering the growth. Micron trades at just nine times forward earnings, well below historical norms for the stock. (Another contrast to 2023: the software sector is now considered a potential victim of AI, with the iShares Expanded Tech-Software ETF down 15% in 2026, versus a 58% rally in 2023.)
However, the software sector remains volatile. Historically cyclical, investors debate whether it has actually turned the corner into a secular grower due to the AI buildout. The massive institutional ownership is also creating demand for puts on the sector, as large investors look to hedge bets.
These dynamics could make the SOXX index a particularly appealing play for investors willing to do the options legwork themselves. Investors can stand to make a return of roughly 16 percent annualized over a year.
How? Here's my idea: Sell a six-month put on SOXX at a $500 strike -- 15% below today's $591 price -- for around $29 per share. The cash collateral earns another 4.4% in a money-market fund alongside. If SOXX holds above $500, the put expires unexercised. The combined return approaches 16% annualized. If SOXX falls below $500, the investor is assigned the index at a net cost of $471 -- a 20% discount to today's price.
Giving up upside. The trade-off in both the buffer and the SOXX strategies is some of the potential upside. Buffer ETFs are designed to sacrifice gains beyond a defined cap. And selling puts trades upside for yield if the options expire out of the money, but allows investors to build a position at a discount to current levels if they are assigned shares. As markets turn to the show-me phase, that trade-off may be increasingly worth it.
Vishesh Kumar is co-founder and CEO of Stockato.ai, an investment platform that uses artificial intelligence and alternative data to improve investment outcomes. He most recently worked at asset managers with assets under management of more than $1 trillion, and previously a financial journalist.
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(END) Dow Jones Newswires
July 02, 2026 10:58 ET (14:58 GMT)
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