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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crusty curmudgeon's picture

Articles like this will get the internet shut down.

svayambhu108's picture

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

SafelyGraze's picture

the point of this article is to recommend buying IBB

one of the benefits of reading zh: actionable informations!

James_Cole's picture

It appears this fact was NOT well known...

Tyler, market mover?

jbvtme's picture

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

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

Bosch's picture

NOW you're starting to lose confidence? 

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)....

SilverDOG's picture

crusty curmudgeon,



"We the People" need to create an alternative.

"Shut. it. Down. !"


The Axe's picture

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

Bunga Bunga's picture

Maybe WSJ needs to put this behind the paywall:

Russell 2000 100.50



Serfs Up's picture

Caveat idolator

ParkAveFlasher's picture

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

whisperin's picture

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

whisperin's picture

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

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.


Say What Again's picture

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

Oracle of Kypseli's picture

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

Fox-Scully's picture

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

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! ;)


Kayman's picture

Printing the next $ 4 trillion might be interesting.

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."

Bunga Bunga's picture

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

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.

fourZero's picture

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

Relentless101's picture

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

Kayman's picture

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

Mark123's picture

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

I assume this also applies to other ETFS?

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

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.

jubber's picture

Wow Russell just turned red!

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?

blindman's picture

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

booboo's picture

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

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

buzzsaw99's picture

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

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.

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.

Yen Cross's picture

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

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.


Tenshin Headache's picture

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

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).

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.

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.

What is The Hedge's picture

Can you short an ETF?