How to Invest in Nanotech

Nanotechnology, which involves the development, manufacture, and application of products at the molecular level, should have a profound impact on virtually every business if implemented successfully. Although there are skeptics, the stock prices of companies using the technology, including blue chips IBM (IBM), Intel (INTC), and General Electric (GE), could benefit. In fact, an exchange-traded fund (ETF) devoted to nanotech is taking off.

To understand the dimensions, consider that one nanometer is equal to about one one-billionth of a meter, or 1/75,000th of the diameter of a single human hair. At this level, materials exhibit properties that reflect quantum physics. "Nano-scaled" products range from tiny robots or micromachines to nano-particles that could help clean the environment (see BW Online, 4/10/06, "Tapping Nature's Tool Kit").


  Indeed, the growing importance of nanotechnology was underscored by President George W. Bush in the State of the Union address in January. He proposed to double the Federal commitment to the most "critical basic research programs in the physical sciences over the next ten years," including nanotechnology.

Lux Research, a nanotechnology research and advisory firm, estimates that revenues from products using nanotechnology will increase to $2.6 trillion in 2014, equal to about 15% of global manufacturing output, from $13 billion in 2004. By then, the firm believes nanotechnology will be a routine part of everyday living.

Jack Uldrich, president of the consultancy NanoVeritas Group, estimates that corporations around the world will spend more than $10 billion on nanotechnology R&D in 2006. He indicates that he closely follows about 100 U.S.-based nanotech firms, of which 60% are privately held. Of those, roughly 60 have commercial products currently on the market and about 22 are profitable.


  "These firms are supplying nano-scale equipment to the nanotech industry, as well as to big companies like IBM and Intel," Uldrich notes. He believes the number of nanotech companies, profitable or otherwise, will continue to increase.

Late last year, Lux Research, in tandem with PowerShares Capital Management, launched an exchange-traded fund, the PowerShares Lux Nanotech Portfolio (PXN), for investors seeking to invest in nanotechnology. The tiny $89-million fund invests in 26 stocks in the Lux Nanotech index. Year to date through Mar. 28, the ETF gained 11.8%, vs. 3.9% for the S&P 500-stock index. (The portfolio is too new to be ranked by Standard & Poor's.)

The Lux index consists of companies that make tools used to develop nanotechnology, and well-established firms integrating nanotechnology into their existing products. Components are broken down into two basic types of stocks: "nanotech specialists" and "end-use incumbents." The specialists, including FEI Co. (FEIC) and Flamel Technologies (FLML), are small- and mid-size companies that focus specifically on developing or funding nanotechnology applications. The end-use incumbents are large-cap companies applying nanotech to existing product lines. The two groups are then equally weighted with 75% applied to the nanotech specialist components and 25% for the end-use incumbents.


  While some see the ETF as a good vehicle for those who want to invest in nanotechnology, others point to its drawbacks, such as holdings that are not yet profitable and the extreme volatility associated with industry-specific funds that seem gimmicky.

Srikant Dash, index strategist at Standard & Poor's, notes that narrow sector ETFs have two legitimate uses. "First, money managers who have a view on a narrow industry, but do not have a view on individual stocks within that narrow sector, can use these ETFs to implement their views," he says. "The second user group consists of trading desks and active traders who trade frequently on news about a narrow industry, or want to manage their risk exposure to it."

Another way investors can play nanotech initially is by investing in large-cap companies applying the technology to their existing product lines, thereby avoiding unstable and unprofitable startups. Nanotech is expected to have a powerful impact on three major industries initially: semiconductors, life sciences, and energy.


  Many well-known firms are already integrating nanotech, says Peter Hebert, chief executive officer of Lux Research. "For example, 3M Co. (MMM) stated it has $800 million worth of nano-enabled products it is selling right now," he says. "American Pharmaceutical Partners (APPX) has a new cancer drug, Abraxane, that is enabled by nanotech. It is on the marketplace as we speak."

Big pharma companies are using new nano-particles to reformulate existing drugs to make them more effective and potent, and therefore extend the patent and lead to bigger revenues, experts say.

While some observers remain skeptical about nanotech's near-term future as a viable investment, Uldrich is confident it is not an overblown "fad," like many dot.coms were. "There will initially be some excessive hype surrounding nanotech and some fraudulent companies trying to exploit investor excitement," he says. "But what distinguishes nanotech from things like the craze is that legitimate nanotech companies have to have a strong scientific and technical background and foundation. This will limit the number of companies that enter the field."

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