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

Posted
5/16/2012 1:02:00 PM
By: Benzinga
Referenced Stocks:FBT;FDN;IGV;PSJ;XSW

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 .

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