How to buy assets: investment vehicles

One of the biggest confusions when you start investing is thinking that ETFs, funds or shares are different “things” at the same level. They are not.

You do not choose between assets or vehicles. First you choose the asset you want to invest in (stocks, bonds, real estate, crypto…) and then you decide how to access it.

We have already mentioned some vehicles in the previous section; now, after this outline, I am going to explain all the main ones:

1. Interest-bearing accounts
2. Deposits
3. Pension plans
4. Funds
• Active management
• Passive management (index funds)
5. ETF
6. Direct shares
7. Crypto tokens

This is the third article in the series in which I explain why you need to invest, how and where, so you can learn the essentials even if you are starting from zero:

1. Investing from scratch: where to invest your money.
2. Types of assets you can invest in according to their role in the portfolio.
3. How to buy assets: investment vehicles. (This is the one you are reading).
4. Investment platforms: where to buy investment vehicles or assets.
5. Investment risks and protections.
6. My investment system.
7. Wealth: how to grow it, protect it and pass it on.

#1. Interest-bearing accounts

Probably the simplest vehicle for your liquidity, since interest-bearing accounts work almost like traditional bank accounts, except that they generate a return based on the amount you have deposited.

That return usually depends on the balance. For example, a bank may offer 1.5% up to €25,000, 1.75% between €25,000 and €50,000, and 2% above that amount. These percentages are not fixed over time, but they help you understand how they work.

The risk is very low and liquidity is total. You can use the money at any time, usually with linked cards, transfers and everyday banking just like with any account.

#2. Bank deposits

They are similar to interest-bearing accounts, but with one key difference: the money is locked up for an agreed period of time.

In exchange for that lower liquidity, the bank offers a higher return, which, depending on the moment, may fall in ranges such as 3–5%. That return is agreed from the start.

During the agreed term -three months, six months, one year or more- you will not be able to withdraw the money without a penalty, which usually affects the interest generated.

They require more management than interest-bearing accounts, because if you want to maximize return you will have to keep moving the money between deposits as they mature and new offers appear. In return, as I said, they offer a higher yield.

#3. Pension plans

Pension plans are a vehicle designed for the long term, with tax advantages in some cases, since you collect their returns when your income tax bracket is probably lower, but with less flexibility than other assets, as they are very illiquid and you can only recover them under certain circumstances (retirement, long-term unemployment, serious illness or specific cases).

Really, they make sense when your company contributes an extra percentage. In other words, if you contribute X to the pension plan, your company contributes X or Y to your plan, so the investment is multiplied.  

If that is not the case at your company -it usually applies more in large companies- I think these plans are at a disadvantage compared with, for example, funds.

#4. Investment funds

Investment funds are products that pool many investments into one. For example, they can group together shares of technology companies, mining companies or the 500 largest companies in the world.

When you buy units in a fund, you are investing in a set of assets, not in a single company, which helps to diversify and reduce risk.

Within funds, there are two different types depending on how they are managed.

Actively managed funds

Actively managed funds are those where someone decides which shares to buy and sell and when to do it.

In other words, there are human managers who make these decisions based on their judgment and experience.

Generally, these are the ones your bank offers you when you tell them you want to invest. And they do it for a very clear reason: because they are managed by people -who earn a salary-, the fees are higher than those of passively managed funds.

These fees are independent of whether the fund rises or falls in value. You will pay them anyway. And that is why the bank wants you to subscribe to them, since it secures a fee regardless of what the market does and whether the manager gets it right or not.

Index funds or passive management

In contrast to the previous ones, we have passively managed funds, where nobody is making decisions; these funds simply replicate an index.

That index may be the S&P 500 (the 500 largest companies in the US), the Nasdaq (technology-oriented companies) or the MSCI World, to give a few examples.

John C. Bogle, the founder of Vanguard Group (one of the largest investment managers in the world) expressed this philosophy with a very apt metaphor:

When you invest in index funds, you are not looking for the needle in the haystack; you buy the whole haystack.

And, by automatically replicating an index, there is nobody deciding, which makes fees much lower and increases the fund’s return.

But there is more: history has shown that, in the long term, no manager is able to beat the market (their benchmark index). In other words, over ten, twenty or thirty years, investing in an S&P 500 index fund will give you a higher return than any actively managed fund.

That is why index funds are one of the best and simplest ways to invest, and an ideal way to get started in the world of investing for anyone who does not want complications.

Investment goals in funds

To finish this point, I will tell you that, apart from the previous classification according to the type of management, funds can also be classified based on what we expect from them.

We can look for long-term return through price appreciation, which is usually the normal thing at the beginning, but we can also look for them to generate income for us now. And they do that in the form of dividends.

For this latter case, there are funds that group together the companies that have paid the most and best dividends steadily over recent years. 

This selection of companies can be made actively or by replicating a specific index, such as the “dividend aristocrats”, which only includes companies that have increased their dividend for 25 consecutive years.

In addition, depending on the product, those dividends can be distributed or automatically reinvested within the fund.

Again, depending on your current situation (age, income and wealth, mainly), you will be able to prioritize between funds that will be more profitable or others that do not grow as much, but in return guarantee you a steady generation of income.

Finally, one more point to consider is that you can transfer between funds without paying taxes (you do not sell, you move) which is a good tax advantage compared with ETFs.

#5. ETFs

The Exchange Traded Funds can be considered, in a way, similar to funds, since they can group several shares into a single ETF and replicate indexes.

However, ETFs do not necessarily have to invest only in shares or groups of shares; rather, they are a vehicle listed on the stock exchange whose aim is to replicate the performance of an asset or set of assets.

That is why an ETF can:

• Replicate a stock index (such as the S&P 500)
• Invest in bonds
• Track the price of commodities such as gold
• Replicate the performance of Bitcoin or other cryptocurrencies

In the case of gold, for example, there are ETFs that buy physical gold and others that replicate its price through derivatives.

In the case of Bitcoin, there are ETFs that replicate its price directly or indirectly.

There is some additional difference with funds:

• ETFs are usually mostly index-based.
• Every time you sell an ETF, you pay tax on the gain. That tax deferral does not exist, as it does with funds.
• Because they trade on the stock exchange -just like a share- you can buy and sell them at any time during market hours, whereas funds are calculated at market close, not in real time.

So, you may wonder whether they are better or worse than funds.

Each has its advantages, but in my case, if I want to replicate an index, I prefer a fund and I keep ETFs for things like replicating the price of gold or Bitcoin.

#6. Shares

Buying direct shares means that you choose yourself which companies to invest in.

This gives you more control and, in some cases, greater return potential. There are companies like Nvidia or Palantir that, lately, have appreciated far more than indexes such as the Nasdaq or the S&P 500. However, that greater potential also implies more risk. And more management.

Investing in shares requires analyzing companies, understanding their business and taking responsibility for your decisions. It is not simply buying and waiting.

In addition, you may not have enough capital to invest in all the companies that interest you. With funds or ETFs, however, you can diversify with a single investment.

Keep this idea in mind, because it is key:

You can invest in shares in three ways:

• Through an ETF.
• Through a fund.
• By buying them directly.

The asset is the same. What changes is how you access it.

#7. Cryptocurrencies

Finally, one investment vehicle is buying cryptocurrencies, also called crypto tokens.

We have already discussed the main ones (Bitcoin, Ethereum, Solana and stablecoins such as USDT and USDC).

If you want exposure to the price of these assets, you can:

1. Buy the token itself on exchanges (centralized or decentralized trading platforms).
2. You can also buy an ETF that replicates its value.

Each option has its advantages and risks. Buying the asset directly means more control, but also more responsibility, especially when it comes to custody. Financial products simplify the operation, but add intermediaries.

And those forms of purchase are exactly what we are going to look at next.

Conclusions

Investing is not only about choosing good assets, but about knowing what options you have to buy them.

You start with the simplest and most liquid vehicles. The interest-bearing accounts allow you to keep money available with some return and hardly any risk. The bank deposits go one step further: you get a fixed return, but in exchange for leaving the money locked up for a while.

Then the longer-term products come into play. The pension plans are designed for your retirement and stand out for their taxation, although with a major liquidity limitation. In parallel, investment funds allow you to invest in a diversified way without having to manage individual assets. Here you can choose between actively managed funds, where a manager makes decisions for you, or index funds, which replicate indexes with lower costs.

Next come the ETFs, which combine features of funds and shares. They are listed vehicles that allow you to invest in indexes, sectors or even assets such as gold or cryptocurrencies, with easy buying and selling on the market.

At the next level are the assets you buy directly. The shares mean that you choose yourself the companies you invest in, with more control but also more responsibility. The cryptocurrencies, for their part, are a much more volatile and speculative option, with different forms of access depending on the vehicle you use.

The final idea is clear: each vehicle has its function, its advantages and its limitations. Understanding all the options lets you make informed decisions and build a coherent strategy instead of investing without realizing you are basically playing the lottery.

Next steps

If you want to go a little further, I invite you to continue with the next article in the series:

1. Investing from scratch: where to invest your money.
2. Types of assets you can invest in according to their role in the portfolio.
3. How to buy assets: investment vehicles. (This is the one you are reading).
4. Investment platforms: where to buy investment vehicles or assets.
5. Investment risks and protections.
6. My investment system.
7. Wealth: how to grow it, protect it and pass it on.