Yes, that is invalid HTML. It is inserted in that position so that it is "behind" the actual ul contents (the li elements). I guess the resulting invalid HTML is a consequence we accept in exchange for a much-needed fix for the IE bug. That said, bgIframe does not affect IE7 or above, so I think it is not something worth worrying about. In my opinion, IE6 is so broken that anything goes when it comes to bug fixes. As long as the result is that it works like more modern browsers, then personally I'm prepared to live with that and look ahead to (hopefully) improved versions of IE.
Joel Birch