Nanotechnology ETF: Will Small Science Lead To Big Gains?

by on December 15, 2009 | ETFs Mentioned:

In much the same way that the rise of the Internet has changed the world over the past two decades, nanotechnology may shape the way we live over the next twenty years. Nanotechnology, technically speaking, is the engineering of functional systems at the molecular scale, the study of matter that is roughly 100 nanometers or smaller (a nanometer is one billionth of a meter). With countless possible applications in other words, nanotechnology has the potential to drive tremendous technological innovation in coming decades. The question is not if nanotechnology will change our lives but by how much and, perhaps more importantly, how soon.

Multitude of Applications

Nanotech is already appearing in more household products than most consumers realize. It is currently estimated that there are more than 1,000 products that use nanotechnology, including flash drives, air purifiers, and makeup. There are vast applications beyond everyday household uses for this science as well. One of the most interesting is that of carbon-nanotubes, products made from densely packed carbon that possess unique strength, water absorption, and conductivity properties. Due to these properties, carbon-nanotubes are being developed for filtration devices, circuits and computer chips as well as reinforced plastics and energy storage systems.

Another development is nanomaterials, a field that may allow researchers to create new compounds or to improve existing ones on the molecular level. Many nanomaterials use a process called ‘self-assembly‘ in which the ‘atoms or molecules arrange themselves into a structure due to their natural properties.’  By using these processes, scientists can apply nano crystal molecules of extremely hard materials such as tungsten carbide, to tools which will make them much stronger but will use a fraction of the hardened materials. A similar process can also be used for surfaces in order to make them more water and scratch resistant which will increase their durability.

Nanomedicine

Perhaps the most promising sector for nanotechnology is the area of medicine. As of 2006, there were 38 nanomedicine products on the market generating more than $6.8 billion in sales, with the vast majority of these coming in the drug delivery sector of the market. The number of patents issued in this field has grown dramatically over the past few years and big pharma companies are starting to see the benefits of partnering with smaller nanotech companies in order to boost their sagging sales and weak drug pipelines. There are currently a number of nanotechnology inspired drugs that are in trials, ranging from kidney disease medicines to cancer fighting compounds. Partnerships between large pharmaceutical companies and the nanotech industry are expected to increase and strengthen in coming years.

Risks

Nanotechnology remains an obscure and mysterious science to most Americans. In a recent poll, 68% of Americans indicated that they had heard little to nothing about the field (PDF). With such low levels of public awareness about a complex science, it isn’t surprising that field is somewhat controversial, with some individuals fearing that the downsides of nanotech will far outweigh the benefits. This line of thinking has already permeated high levels of government: a former EPA official has called for a new ‘consumer protection agency’ to help oversee the technological changes of nanotech, while Canada has become the first country to require companies to detail their use of nanomaterials.

As far as investment risks go, nanotech is a lot like biotechnology in that there are significant risks along with the potential for big gains. There are also other issues that have not been widely discussed, such as the safety of these nano particles, the long term effects, and what would happen if such powerful technologies ever got into the wrong hands. Such issues, when combined with any new regulatory bodies, could hamper the growth of the nanotechnology industry and greatly increase the costs associated with bringing these types of technologies to market.

Nanotech ETFs

Since investments in individual nanotech companies are extremely risky, many investors looking to gain exposure to this sector have elected to do so through a well-diversified ETF. The only true nanotech ETF is the PowerShares Lux Nanotech Portfolio ETF (PXN). The fund currently holds 23 stocks and is heavily focused on small cap growth firms with over 55% of the fund’s assets going to this class.

Despite the fund’s narrow investment focus, it is well diversified across market sectors. It maintains the highest weightings in health care and information technology stocks, which each comprise roughly 30% of the fund. Materials make up the third highest weighting at about 22% followed by industrials at 11%. PXN has an expense ratio of 0.60% and is up about 34% in 2009.

PXN

With a beta of 1.32, PXN is rather volatile, and likely doesn’t deserve a major allocation in the portfolios of most investors. But for those with a long time horizon and high risk tolerance, a small allocation to this small technology could pay off big down the road.

For more ETF ideas, make sure to sign up for our Free ETF Newsletter.

Disclosure: Eric is long PXN