Investors know to expect some market volatility, especially when firms promise the first commercial returns in a nascent science or technology. In the case of the nanotech sector, examples abound.
In a similar story of unpredictability, Lumera
Clearly, individual nano stocks are not for the faint-hearted and only have a place in the high-risk portion of a portfolio. Still, is there some way investors can minimize the risk and avoid the roller-coaster rides? There are a few options, but we can only counsel patience for those looking for nanotech investment vehicles without choosing individual stocks from a limited number of companies.
For Merrill Lynch
The date couldn't have been more fitting, as the return has been something of an April fool's joke: The index is down 25% vs. the Nasdaq's loss of 5% over the same time frame.
Since then, Merrill Lynch has dropped and swapped several companies from the original 25. Just last week, it added Lumera, which produces proprietary polymer materials to optimize its electrical, optical, and surface properties. At least Lumera is a genuine nanomaterials company, which can't be said for four other firms Merrill removed from the list after discovering they weren't nano companies at all.
In March 2004, New York-based investment bank Punk Ziegel created its Nanotech Index, which is down 24% since its inception. Recently, the company added Lumera, along with Kopin
Neither of these products are investable. However, First Trust's Nanotechnology Portfolio does offer an alternative. We profiled the company's nano-inspired Unit Investment Trust
Outside the U.S., we know of three investable nano funds. All are from Germany and, in fact, were the first available worldwide. Activest created the Lux Nanotech Fund in September 2002, which is up 15% since its inception, but has fallen more than 18% so far this year, reflecting the sector's decline after the nano boom late last year.
In 2003, Hauck & Aufhauser created its fund, the Lux DAC Nanotech-Fonds, which is up 8% since its launch. However, its current star performer, Amcol International
In May 2004, German bank group West LB launched a nano fund. Alas, it's also down since spring.
Punting to management
A final offering -- slightly different from funds or indexes -- gives an investor an immediate basket of public nano stocks and an entree into some private companies. Harris & Harris
In the new Rule Breakers newsletter, David Gardner teaches investors to "scout like a VC" and discover, in the early stages, future rule-breaking companies.
A stake in Harris & Harris might give you access to some rule breakers, but you still have to rely on management to pick the best developing nano companies to invest in. (Note that the majority of Harris & Harris' invested capital is still in non-nano companies -- a carryover from investments made prior to Harris & Harris' change of focus.)
Setting up a strategy
Of the few true nanotech companies, not a single one appears in all of the indexes and funds. To be fair, we're all in the discovery phase of the nanotech universe, and it's important to understand that each investing firm we've mentioned uses different criteria to try to establish a true nanotech index or investable fund.
The problem they've encountered, and the reason smart investors haven't rushed in, is that the nano companies are still at the stage of evolutionary nanotech vs. revolutionary nanotech. That is to say, although the products may work at levels smaller than 100 nanometers, they do not yet display unique properties that promise disruptive commercial applications. It is the potential of nano to provide the disruptive technologies that will bring forward the greatest investment returns.
So are there any promising nanotech investment vehicles? New market opportunities do exist for companies specializing in working at nano levels, and some of those names are included in the aforementioned indexes and funds. But those companies are not yet rule-breakers. That is why the companies in those indexes, with rare exceptions, collectively underperform the market.
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Do you have high hopes for the nanotechnology sector? Share your views with Carl (TMFBreakerCarl) and John (TMFBreakerJohn) in the Nanotechnology discussion board.