Letterboxing is supported for both Windowed and fullscreen options. You shouldn't be experiencing stretching if you disable it and have the windowed option selected. There are minor differences between the two types of letterboxing, but fullscreen should be more performant than windowed + letterboxing, which is essentially borderless + letterboxing. If you want actual windowed, then make sure letterboxing is unchecked and you don't have borderless resolution set as the windowed resolution.
Playing without fullscreen will induce a hit in performance or just feel worse overall due to Windows using V-sync. You can disable it by changing to the Classic theme in Win 7, but you will have to deal with it in Win 8+ (I think there is a hack you can do to disable it in these versions, but it's a lot more involved and may break other functions of the desktop at the same time).