Letters to the Editor
To the Editors:
I believe John Markese missed the boat on exchange-traded funds ETFs for investors like me who are switching, over time, from mutual funds to ETFs [“Face-Off: Mutual Funds vs. ETFs, June 2007 AAII Journal].
The beginning and end of it for me is that ETFs have no trading restrictions.
I once had to close out all my funds from a big name family because their trading restrictions would have forced me to remain in a money-losing situation.
I’m a momentum player. I follow Dick Fabian’s original “Telephone Switch Newsletter” rules and have done quite well over the years. Occasionally, one is caught in a whipsaw and you have to get out fast. With mutual fund trading restrictions that’s a risk I’m not willing to take and a risk I don’t have with ETFs.
So for a guy like me, I think John Markese missed the biggest risk of all. He probably thinks everyone who buys mutual funds (per his comparison) is a buy-and-holder. Not if you don’t have to be.
Ralph Nebiker
Via E-mail
To the Editors:
Your continued assertions that ETFs do not trade at premiums or discounts are simply not true [ETFs were most recently featured in the October 2007 AAII Journal’s “The Individual Investor’s 2007 Guide to Exchange-Traded Funds”]. A recent Barron’s disclosed that the FXI was at a 4% premium to its underlying stocks. This morning Singapore traded up 0.12% but its ETF EWS is down 2%. Also, Fast Money panelists on CNBC acknowledged that only the most liquid ETFs can be traded efficiently. Foreign ETFs track the daily movement of the U.S. market, pure and simple.
Harry Schiller
Via E-mail
To the Editors:
I enjoyed the summary of Phil Town’s investment approach in “The Rule #1 Approach to Finding Wonderful Companies” by Wayne A. Thorp, CFA [October 2007 AAII Journal]. The article mentions that he is a former soldier and river guide, but it does not state whether he has any formal training in economics or finance.
I was surprised to read that the ideal capital structure for a publicly traded company would be 100% equity. When a company is creditworthy, debt is widely understood to be cheaper than equity, and the return on equity is therefore enhanced by a capital structure that includes a reasonable amount of debt. I wonder if Mr. Town is truly espousing a radically different theory of capital structure, and what sort of premium he would place on a debt-free company when picking stocks, or if the article perhaps overstated his views.
Amy Motzenbecker
Via E-mail
Wayne A. Thorp Responds:
I believe what Mr. Town is espousing is to err on the side of caution. He sees companies that carry “high” levels of debt as being riskier than those that carry no debt. No matter their creditworthiness, in his opinion, companies that carry debt bear some risk of defaulting. He also believes there are enough investment opportunities out there for individual investors that there is no need to invest in a company potentially saddled with what he considers too much debt.
To the Editors:
AAII’s 2007 Personal Tax and Financial Planning Guide is an extraordinarily useful document.
I have one clarification you might want to make regarding health savings account HSA contribution amounts [box on page 5], starting in 2007, as a result of legislation signed into law on December 20, 2006. Prior to 2007, the HSA contribution was limited to the deductible amount of the associated policy. As pointed out in the HSA section of the Treasury site you reference (www.treas.gov), this changed to be the $2,850 (for an individual policy) or $5,650 (for a family policy), regardless of the deductible amount. These amounts are indexed for inflation.
Philip C. Levinton
Via E-mail