Over the past 30 years, the low-cost revolution has transformed finance as we know it. Investors not only now have access to near zero fee mutual funds/ETFs, but nearly every publicly traded firm around the world is available to a U.S. investor wrapped in a tax-efficient and diversified ETF with a few clicks of a button.
While this seemingly is a good thing for the average investor, the appearance of zero costs to trade, paired with high valuation levels, has induced a new type of risky behavior amongst retail investors — seeking out high volatility zero-sum products and turning their back on the less risky, simple, positive-sum products like market-wide ETFs — a behavior akin to financial nihilism, which the World Economic Forum describes as “the sense that the economic system no longer rewards prudence or long-term planning,” a shorthand for Gen Z’s “apparently self-destructive relationship with money, which includes crypto bets, prediction markets and retirement accounts raided to pay off credit cards.”
I believe that financial institutions must share in the blame in this phenomenon. Since it is no longer profitable for brokerage houses to make money on broad market mutual funds or ETFs, they have had to dream up other, higher-margin products to make available to retail investors. These products are almost exclusively in the realm of derivatives and serve retail investors next to no practical purposes, yet can be highly profitable to those issuing them in the transaction fees associated with them.
