Investors remain confused over the subtleties of exchange-traded funds and Vanguard Viper class shares, according to our latest mail sampling.

Our recent column on Vanguard Vipers drew a number of questions from readers, so we thought a little clarification on some of the finer details of these ETF shares were in order.

Background: The name VIPER stands for Vanguard Index Participation Equity Receipts. Each of Vanguard's Vipers amounts to a new class of shares of one of the company's well-known index funds. The underlying portfolios are identical, though fees and other attributes are different from those of Vanguard funds.

Like other ETFs, Vipers are bought and sold on stock exchanges, not directly from or to the issuing company, as is the case with mutual funds.

Walt in Laramie wrote to point out, correctly, that buying and selling prices for Vipers may differ from the underlying market value of the portfolio and that there is a spread between bid and ask prices. These fluctuations, coupled with the relatively thin market for Vipers, can make trading them less predictable and perhaps more costly than trading other ETFs.

Because of this unpredictability, Viper investors who use market timing -- something they cannot do with Vanguard's funds -- may have trouble moving in and out of the markets at the exact prices that are targeted by their timing systems.

Of course, mutual fund investors have the same problem. As another reader pointed out, a decision to buy or sell a fund must be made well before the close of a market, and the closing price can be subject to heavy volatility in the final hour of a trading day.

Viper investors who want to get in or out in the middle of a trading day don't have control over the exact price of their trade, but they may be able to come closer than mutual fund investors.

Several readers had trouble with my assertion that Vipers skimp on diversification. Gary in Hartford quoted the prospectus of Vanguard's Total Stock Market Fund (VTSMX: news, chart, profile), the basis for one Viper (VTI: news, chart, profile), saying the fund's goal is "to track the performance of the Wilshire 5000 Total Market Index, which consists of all the U.S. common stocks regularly traded on the NYSE, AMEX and Nasdaq markets."

This is a true statement. But the Wilshire 5000 Index (97199001: news, chart, profile) is still not truly diversified. The index really gives only the appearance of diversification.

My definition of proper diversification calls for roughly equal weighting in large-caps and small caps as well as growth and value. It's true the Wilshire 5000 Index includes tiny companies alongside the Microsofts, General Electrics and Pfizers. But indexes are market-cap weighted, meaning the holdings of huge companies totally overwhelm those of small companies.

Whatever influence the tiny companies have on such an index is totally overwhelmed by what happens to the giant companies. Large-cap growth companies have a history of producing the lowest long-term returns of all the major equity asset classes, and it's a mistake to devote the majority of any portfolio to them.

I stand by my contention that Vanguard's Total Stock Market Fund, and its corresponding Viper, is essentially a large-cap blend fund. That's how Morningstar classifies this fund -- and its trailing performance for the previous one-year, three-year, five-year and 10-year periods has not strayed much from the performance of the quintessential large-cap blend fund, Vanguard 500 Index (VFINX: news, chart, profile).

Another reader suggested I missed the boat by not pointing out that "the main reason to buy a Viper instead of an index fund is to defer the income tax on capital gains."

This reader may be referring to a common misconception that, Vipers and other ETFs don't have to distribute their dividends and capital gains the way mutual funds do.

Unfortunately, that's not true. A Vanguard representative pointed out that about 60 percent of ETFs made capital gains distributions last year, primarily because of the numerous changes in the underlying indexes.

Hedging is one possible use for investors. Some investors with large positions in one of the underlying funds have used Vipers to lock in a position without selling.

For example, a few investors who own shares of the Total Stock Market Fund have executed short sales in Vanguard Total Stock Market Vipers to lock in their present positions in the fund.

That way, if the market declined, the resulting gains in the Vipers would presumably offset losses in the fund. Of course this hedging strategy works in the opposite direction, too. If the market rose, the value of the Vipers would decline, offsetting gains in the mutual fund.

Such a strategy might be appropriate for sophisticated investors with large amounts of money at stake. But I believe most investors will be better off if they limit their risks through asset allocation or mechanical market timing.

The bottom line for me is that I still haven't found any compelling reason for most investors to consider Vipers.