The WSJ has a good article today (paid sub req'd) about how the different ETF providers calculate their ETFs' PE ratios. Barclays calculates the PE ratios of its ETFs by excluding companies that are not profitable.
The result is that they claim that their Russell 2000 ETF has a P/E ratio of 19.1. If negative profits are included, however, the PE ratios of the Russell 2000 is 41.
Now, we all know that the PE of an individual stock with negative earnings has no meaning, but in a basket of stocks it has plenty of meaning: The negative earnings simply detract from the positive earnings of other stocks.
Think about it this way: Let's say you bought 100% of the equity of every stock in the Russell 2K (The market, as a whole, has done that). What would you say that your earnings were? Would you ignore your losses? If so, how would you fund them?
What would you tell the IRS? Would you not report your losses to offset your gains?
If you ask me, not including negative earnings in the Russell 2000 ETF is simply outright deceit, and Barclays should be ashamed.