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    Letters to the Editor

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    To the Editors:

    In the January 2008 Letters to the Editor, Harry Schiller seems to say that foreign ETFs (like FXI, EWS) are really geared to the U.S. stock market even though they are supposed to track a foreign country stock market index. Also, he thinks that premiums and discounts are the way the powers that be make this happen.

    Am I interpreting this correctly? And if so, is it true?

    Karl Cook
    Via E-mail

    The Editors Respond:

    Because of the way most exchange-traded funds (ETFs) are structured and traded, discounts and premiums to net asset value (NAV) are not a major issue, with institutional arbitragers helping to keep prices on the secondary markets close to their actual NAV. Some ETFs do diverge, and typically this is related to the liquidity of the ETF’s underlying basket of securities. For ETFs that track indexes with less liquid holdings and in which arbitraging is more difficult, divergence is more likely to be greater. For a description of how this process works, see the section How They Work in AAII’s “Guide to Exchange-Traded Funds” in the October 2007 AAII Journal.

    To the Editors:

    I always enjoy reading about the performance of investments guided by the AAII Stock Screens, such as the overall review in this past January’s issue and the discussion of the CAN SLIM strategy in the February 2008 AAII Journal. But I have a question about the benchmark identified as “All Exchange-Listed Stocks.” While quite volatile, this benchmark actually performs reasonably well over time (up 245.6% for the last 10 years), but what does it actually represent? Is there an index fund that can be purchased that would approach its performance?

    When I look at the performance of, say, a Dow Jones Wilshire 5000 index fund or other “total market” funds, they don’t come anywhere close to 245% over the last 10 years—most have increased about 100% over that time.

    The fact that this benchmark’s performance is also higher than what might be considered its various components also doesn’t make sense to me—i.e., shouldn’t the total market performance be a weighted average of the performance of the large-, mid-, and small-cap indexes you show (55.1%, 165.6 and 125.1%)? Can you explain what that index really represents and how it relates to the others? [Editors’ note: Mr. Goklen cites returns from the January 2008 article, “Master Strategists for 2007: AAII’s Top Stock Screens,” with data as of December 7, 2007.]

    Kent Goklen
    Via E-mail

    Wayne A. Thorp Responds:

    The “All Exchange-Listed Stocks” designation refers to an equal-weighted “index” of all stocks traded on the American, New York, and NASDAQ exchanges. It is a “total market” index, but the key difference from other indexes such as the Dow Jones Wilshire 5000 is that it is equal-weighted. Most of the popular indexes—S&P 500, DJ Wilshire 5000, etc.—are market-cap weighted. Therefore, their performance is driven primarily by the largest companies, a very small percentage of the overall stock membership in the respective index. According to the index calculator at the Wilshire Web site (www.wilshire.com), the DJ Wilshire 5000, a cap-weighted index, has had average annual returns of 4.53% over the last five years. By comparison, the equal-weighted DJ Wilshire 5000 has had average annual returns of 13.91% over the same period. Given this annual performance, over the 10-year period the equal-weighted index outperformed the cap-weighted index by over 136 percentage points.

    To the Editors:

    I’m surprised you printed “Your Tax Refund: Avoid the Urge to Splurge” in the Briefly Noted section of the April 2008 AAII Journal. I would have thought it’s pretty naïve stuff for our sophisticated membership.

    What is “enviable” about finally getting repayment of an unnecessary interest free loan to the government? Why would it be a “surprise,” nice or otherwise, if you are doing even the most basic financial planning?

    The concept of a tax refund as some sort of miraculous windfall seems uniquely American and encourages this “splurge” mentality. You should be encouraging your members to regard it simply as an annual adjustment to their cash flows. Maybe many need this as an enforced savings technique, but surely not AAII members? Personally, I like to write a check on April 15.

    John Ward
    Via E-mail