4 High P/E ETFs (IBB, IGV, PNQI)


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Calculating a stock's price-earnings, or P/E ratio is easy. Simply divided the stock's price by the trailing 12-month earnings per share or the EPS estimate for the coming year and you've got a trailing and forward P/E ratio.

With ETFs, calculating this oft-used valuation metric isn't as simple and some debate the validity of even doing so, saying an ETF's P/E isn't as instructive as an individual stock's. There has even been some controversy surrounding how ETF sponsors calculate P/E ratios for their funds. Back in 2006, the Wall Street Journal reported that Barclays (NYSE: BCS ), then the owner of iShares, was not including the P/E's of unprofitable companies its ETFs held .

For those that want to calculate an ETF's P/E ratio on their to test its validity, the task is cumbersome. With an index fund, you'd be forced to gather the P/E's of the index constituents, then compute a weighted sum based on each stock's weight in the index to find the ETF's overall weight.

Bottom line: Different fund sponsors employ different methodologies when coming up with an ETF's P/E ratio. So for the purposes of this piece we went searching for ETFs currently holding multiple high P/E stocks or those funds that have a higher P/E relative to their peer groups.

PowerShares NASDAQ Internet Portfolio (Nasdaq: PNQI ) Despite its thin volume, the PowerShares NASDAQ Internet Portfolio is home to some marquee, high P/E growth stocks and the ETF could also make a name for itself by becoming a possible destination for Facebook .

For now, PNQI's P/E ratio is almost 30, far higher than the 15.96 offered by the PowerShares QQQ (Nasdaq: QQQ ). PNQI also sports a higher P/E than its nearest rival, the First Trust Dow Jones Internet Index Fund (NYSE: FDN ).

One look at PNQI's holdings explains why. Amazon (Nasdaq: AMZN ) accounts for over 10% of the fund's weight and that stock trades for 88 times forward earnings. Rackspace (NYSE: RAX ), another PNQI top-10 holding, trades for over 46 times forward earnings.

iShares Nasdaq Biotechnology Index Fund (Nasdaq: IBB ) Biotech ETFs have certainly plenty of days in the sun this year and IBB, the largest of the group is no exception. There's a bit of a cautionary tale here, though. IBB's P/E ratio is 29.3, according to iShares data. That makes it far more expensive than the SPDR S&P Biotech ETF (NYSE: XBI ) and the First Trust NYSE Arca Biotechnology Index Fund (NYSE: FBT ).

In the case of FBT, that fund has sharply outperformed IBB and XBI this year and has a lower P/E than both. The performance gap is too compelling to ignore and investors can have that added alpha at a superior valuation to IBB.

iShares S&P North American Technology-Software Index Fund (NYSE: IGV ) IGV's 54-stock roster doesn't hold a lot of surprises. Microsoft (Nasdaq: MSFT ), Salesforce.com (NYSE: CRM ) and Oracle (Nasdaq: CRM ) combine for 23% of the fund's weight. The surprise is a P/E of 30. That's far higher than the PowerShares Dynamic Software Portfolio (NYSE: PSJ ), which features more exposure to small-caps. The SPDR S&P Software & Services ETF ( XSW ), which uses more of an equal-weight approach to the software space, also features a lower P/E than IGV.

SPDR S&P Semiconductor ETF (NYSE: XSD ) The SPDR S&P Semiconductor ETF doesn't do what other semiconductor ETFs do and that is excessively weight themselves to Intel (Nasdaq: INTEL), Taiwan Semiconductor (NYSE: TSM ) and Texas Instruments (Nasdaq: TXN ).

However, investors will find a higher P/E with XSD than with the iShares PHLX SOX Semiconductor Sector Index Fund (Nasdaq: SOXX ). SOXX devotes over a quarter of its weight to the aforementioned usual suspects of chip ETFs, but the fund has also sharply outperformed its SPDR rival in 2012.

For more on high P/E/ ETFs, please click HERE .

(c) 2012 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , ETFs , Investing Ideas
Referenced Stocks: FBT , FDN , IGV , PSJ , XSW

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