What Is The PE Of The iShares Biotech ETF? It Depends On Whether You Read The Fine Print

Tyler Durden's picture


Something amusing, or rather, shocking was revealed when we decided to check on a fact Jim Grant noted yesterday in the fine print of the iShares Biotech ETF, also known as the IBB.

As a reminder, this is an ETF whose price over the past two years had gone absolutely parabolic and which almost doubled in the past year until the recent tremors managed to put a slight dent in the second tech/story bubble.


So say one is suddenly concerned about the valuation of the ETF and decided to check what the P/E multiple of the underlying biotech basket. One can simply pull the iShares IBB fact sheet where one would find the following...


Ok so, 41x P/E: not exactly cheap but hardly the ridiculous bubble valuations one is used to from the first dotcom bubble, right? Wrong. Because if one reads just a little further down the page one finds the following shocking disclaimer:

Here is what the highlighted section says:

Negative earnings are excluded, extraordinary items are excluded, and P/E ratios over 60 are set to 60.

What? So basically the "reported" PE is one which just happens to exclude all companies with negative earnings, and also rounds down any biotech company with a PE higher than 60x to... 60x.

Here alarm bells should be going off, because clearly the whole purpose of this latest "fudge" is to make the ETF appear more palatable then it is, when in reality the actual PE of the companies is something vastly different.

Haw vastly? We decided to break down the components of the IBB using Bloomberg financial data, and found the following stunners:

  • Of the 122 companies that make up the basket, only 25 have an LTM P/E multiple that is under 60X (and above 0.0x)
  • What is worse, of the entire IBB company universe, a whopping 86 companies have negative net income, which according to the definition are simply excluded from the calculation!

In other words, 80% of the companies that make up the IBB are either "adjusted" or outright excluded from P/E calculation purposes.

So what happens when one adds across the market caps of the constituent companies and divides by their consolidated earnings, and yes including those companies that have negative earnings.

The result is shown below.

Or reported PE 40.9x, real PE: 82.5x. Just a slight difference.

Bottom line: the reported P/E of the IBB index is more than 50% lower what it really is!

Of course, in this current market bubble, we doubt anyone would care much if at all about fundamentals, as the only games in town are i) excess liquidity, ii) momentum and iii) finding a greater fool to sell to before the bubble really bursts and things like P/E multiples and generally fundamentals are again relevant.


It appears this fact was NOT well known...

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Thu, 05/08/2014 - 12:44 | 4740160 crusty curmudgeon
crusty curmudgeon's picture

Articles like this will get the internet shut down.

Thu, 05/08/2014 - 13:03 | 4740231 svayambhu108
svayambhu108's picture

There's an Ukrainian saying: stay close to the kitchen and far from the boss.

Thu, 05/08/2014 - 13:11 | 4740261 SafelyGraze
SafelyGraze's picture

the point of this article is to recommend buying IBB

one of the benefits of reading zh: actionable informations!

Thu, 05/08/2014 - 13:14 | 4740271 James_Cole
James_Cole's picture

It appears this fact was NOT well known...

Tyler, market mover?

Thu, 05/08/2014 - 13:52 | 4740410 jbvtme
jbvtme's picture

lies, deceit, fraud...i'm beginning to lose confidence

Thu, 05/08/2014 - 14:29 | 4740552 SeattleBruce
SeattleBruce's picture

"Or reported PE 40.9x, real PE: 82.5x. Just a slight difference."

Can't blame them.  They're just taking their lead from the wonderful government (BLS, et al) and FED economists who do this kind of thing all the time...what's the big deal?  It's simply keeping up with the (economist) Jones's.  /s

Thu, 05/08/2014 - 16:33 | 4741047 Bosch
Bosch's picture

NOW you're starting to lose confidence? 

Thu, 05/08/2014 - 13:17 | 4740279 john39
john39's picture

i'm certain that in the current environment of forceful government regulation of wall street, that this one stock is an outlier, and you won't find this gimmick in any other stocks...  (laughing hysterically as i type)....

Thu, 05/08/2014 - 13:39 | 4740365 SilverDOG
SilverDOG's picture

crusty curmudgeon,



"We the People" need to create an alternative.

"Shut. it. Down. !"


Thu, 05/08/2014 - 14:25 | 4740539 The Axe
The Axe's picture

SIMPLY the best of info Jim Grant and Tyler can offer..amazing just amazing

Thu, 05/08/2014 - 14:25 | 4740544 Bunga Bunga
Bunga Bunga's picture

Maybe WSJ needs to put this behind the paywall:

Russell 2000 100.50



Thu, 05/08/2014 - 12:45 | 4740165 Serfs Up
Serfs Up's picture

Caveat idolator

Thu, 05/08/2014 - 12:47 | 4740168 ParkAveFlasher
ParkAveFlasher's picture

We are a country full of mocking ash-holes, until we aren't.

Thu, 05/08/2014 - 12:48 | 4740172 whisperin
whisperin's picture

WoWser! What about the rest of the ishare ETF's methodology... like maybe the SP500 or the Russel?

Thu, 05/08/2014 - 12:50 | 4740177 Tyler Durden
Thu, 05/08/2014 - 12:54 | 4740197 whisperin
whisperin's picture

Thanks Tyler...I think! I wonder if if anyone in a corner office with their panoramic view is muttering ... OH SHIT!!

Thu, 05/08/2014 - 13:03 | 4740232 DavidC
DavidC's picture

Anyone with any intelligence has been saying that for the last 5 years, since QE ("We are not monetizing the debt", "We are not printing money") started.


Thu, 05/08/2014 - 13:24 | 4740314 Say What Again
Say What Again's picture

I wonder if there are any gems of this nature deep in the anals of some report about BLK

Thu, 05/08/2014 - 12:57 | 4740205 Oracle of Kypseli
Oracle of Kypseli's picture

Why is anyone consider staying in this markets is beyond me. Gamblers?

Thu, 05/08/2014 - 13:05 | 4740242 Fox-Scully
Fox-Scully's picture

Simple--It is the blind squirrel/acorn syndrom.

Thu, 05/08/2014 - 13:35 | 4740350 SilverDOG
SilverDOG's picture

Got Nuts ?

Thu, 05/08/2014 - 14:01 | 4740448 lrdrvrZH
lrdrvrZH's picture

I don't try to invest against the Fed. No matter how idiotic their policies are. A lot of good people invested with common sense but against Fed policies and they're poor now.

Being in this rigged market that ultimately will suffer from the Fed's policies is not an endorsement. I'm in it purely for the money. But my trailing stops are tight! ;)


Thu, 05/08/2014 - 14:14 | 4740500 Kayman
Kayman's picture

Printing the next $ 4 trillion might be interesting.

Thu, 05/08/2014 - 15:51 | 4740930 Its_the_economy...
Its_the_economy_stupid's picture

I don't try to invest against the Fed


Diamond Jim Brady was asked if he knew the Bunko game he playing in was rigged. He answered, "of course." When asked why he was playing in it anyway he replied, "Because its the only game in town."

Thu, 05/08/2014 - 18:32 | 4741418 Bunga Bunga
Bunga Bunga's picture

When all are betting on $4 trln it won't be enough. Try $40 trln.

Thu, 05/08/2014 - 13:59 | 4740430 Mercury
Mercury's picture

I'm sure they'll claim it's necessarily a harmonic mean since some stocks have no or negative earnings. Gotta adjust somehow I suppose.

Nonetheless the result is garbage-in-garbage out at best.

Thu, 05/08/2014 - 15:53 | 4740933 fourZero
fourZero's picture

Would really like to see the actual PE for S&P 500 ETF!

Thu, 05/08/2014 - 12:52 | 4740186 ragemachinest
ragemachinest's picture


Thu, 05/08/2014 - 13:18 | 4740284 Relentless101
Relentless101's picture

How is this not insanely illegal? I actually bursted into laughter when I read the disclaimer.

Thu, 05/08/2014 - 14:17 | 4740509 Kayman
Kayman's picture

That which is illegal in made legal for the financial criminals.  Anything you do is illegal.

Thu, 05/08/2014 - 12:54 | 4740194 Mark123
Mark123's picture

So, in other words, the crappy companies are excluded.  Brilliant.

I assume this also applies to other ETFS?

Thu, 05/08/2014 - 12:54 | 4740195 risk-reward
risk-reward's picture

Good catch.

Thu, 05/08/2014 - 12:54 | 4740196 Spungo
Spungo's picture

lol 10x price to book

Everbody, everybody, just get into it, get stupid,
Get retarded, get retarded, get retarded,
Let's get retarded, let's get retarded in here

Thu, 05/08/2014 - 12:59 | 4740200 Cthonic
Cthonic's picture

Negative P/B and P/B over 25 are excluded as well...

But hey, a three year standard deviation of 19%  ~  back up the truck, we're headed to the moon, via the earth's core.

Thu, 05/08/2014 - 12:58 | 4740210 jubber
jubber's picture

Wow Russell just turned red!

Thu, 05/08/2014 - 12:59 | 4740215 Yancey Ward
Yancey Ward's picture

Well, negative earnings aren't really earnings at all, so it makes perfect sense to not include them in a P/E calculation.  And if a P/E is over 60, well that is so close to being negative, we may as well call it 60, or even better, don't even include it!  See, I improved the calculation for the ETF!  Where is my bonus?

Thu, 05/08/2014 - 13:01 | 4740226 blindman
blindman's picture

it is not like anyone is using real money,
are they?

Thu, 05/08/2014 - 16:11 | 4740255 booboo
booboo's picture

"It is not like anyone is using real money,
are they?"

No, fiat, bitemecoin, fairypubics, unicorn farts, and eye of newt

Thu, 05/08/2014 - 13:02 | 4740227 buzzsaw99
buzzsaw99's picture

to the BISmobile? doesn't have the same ring to it.

Thu, 05/08/2014 - 13:02 | 4740230 Yen Cross
Yen Cross's picture

  The department of BLS taught them well... I don't see how that tiny disclaimer indemnifies them if that fund goes tits up.

Thu, 05/08/2014 - 13:09 | 4740254 lasvegaspersona
lasvegaspersona's picture


you only need indemnification if you are causing trouble. If you are 'helping' the story of the glorious recovery of the fatherland you'll be protected.

Thu, 05/08/2014 - 13:16 | 4740273 Yen Cross
Yen Cross's picture

  I wonder what the $ value that 80% of excluded companies represents? ( of total fund value)

Thu, 05/08/2014 - 13:06 | 4740239 bankonzhongguo
bankonzhongguo's picture

A friend recently asked me where the (next) "bubble" is going to be.

I said it already here, but it's not real estate.  It's not Internet 2.0 or even biotech.  It's not prison REITs or shotguns and canned food or African bug farms.

We are living in a Fraud Bubble.

The hot money invests in Crime; from the Political Parties, to a corrupt Congress and staff to the Executive, to the Deep State, to the manifestly corrupt Fed and its shareholders, to the revolving door "regulators" to the insiders/directors to the executives on the edge of being downsized by robots and computers to the underemployed millions scrambling to survive to the debt-bondaged 20-somethings that are facing a for-profit debt-prison complex to millions living in quiet and forgotten desperation on Food Stamps and the killing-lie that is Obamacare.

From the Fed on down to the cost of bacon and coffee in your local grocer, EVERYTHING is a rigged fix.  It does not matter what the industry or segment is, you are either an insider with an army of lobbyists and insider market making info or you are a Pig Muppet.

It's the Fraud Bubble.


Thu, 05/08/2014 - 13:16 | 4740263 Tenshin Headache
Tenshin Headache's picture

Fraud and corruption are endemic toward the end of historic credit bubbles.

Thu, 05/08/2014 - 13:22 | 4740305 centerline
centerline's picture

Is there an ETF for that?

Thu, 05/08/2014 - 13:46 | 4740384 cro_maat
cro_maat's picture


Thu, 05/08/2014 - 14:20 | 4740362 Chief Wonder Bread
Chief Wonder Bread's picture

But what will they call it? You can't call it the Fraud Bubble because that's too generic.

How about the Greedspankme Bubble (it sure as hell has been spanking me with yield suppression).

Thu, 05/08/2014 - 14:56 | 4740696 Chief Wonder Bread
Chief Wonder Bread's picture

Yellen says 'I don't know what to call our system,' in testimony before CONgress:


You can call it the GREEDSPANKME system, Mr Chairwomanman.

Thu, 05/08/2014 - 14:26 | 4740545 Kayman
Kayman's picture

Big Mac meal in 1968- change back from $1.00 

Big Mac meal today $7-9 bucks depending on where you live.

Inflating is 700 to 900 %.  And please don't tell me ground up lips and arseholes taste better
today than in 1968.

Thu, 05/08/2014 - 13:05 | 4740240 What is The Hedge
What is The Hedge's picture

Can you short an ETF?

Do NOT follow this link or you will be banned from the site!