In Search of Profits From Nanotechnology

Another nanotech specialist, Flamel Technologies (FLML), uses nanotechnology to improve drug-delivery systems, which it licenses to big pharmaceutical companies. Other nano-specialists include Symyx Technologies (SMMX), which has a technology that accelerates the process for creating new materials, and Accelrys Inc. (ACCL), which develops molecular modeling and software simulation to facilitate new product design and drug discovery for the life sciences industry. Both these companies have licensing arrangements with big corporations.

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 said. "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 a narrow industry."

Big Blue Chips Go Tiny

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 start-ups. Nanotech is expected to have a powerful impact on three major industries initially: information technology/semiconductors, life sciences and energy.

Many well-known firms like 3M Co. (MMM) are already integrating nanotechnology, Hebert noted. American Pharmaceutical Partners Inc. (APPX), he cited, "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, which leads to bigger revenues, experts say.

Among other end-use incumbents, Japanese carmaker Toyota Motor (TM) has long been involved in nanotechnology research, which includes the development of automotive fuel cells that have nano-structured components. Semiconductor giant Intel produces transistors with nano-scale features and is increasingly focusing on new innovations like carbon nanotube-based electronics.

The bluest-chip company of them all, General Electric (GE), has said that nanotech is one of its three top priorities, and that it will invest up to $50 million annually in this technology. The giant German conglomerate BASF will invest $200 million over the next three years in nanotech research & development. Within four years, it expects, between $60-$75-billion in revenues will be attributable to nano-enabled products.

Uldrich is especially excited by nanotechnology's potential impact on the energy industry. "Among other innovations, nanotech will make coal a cleaner energy source, and make the transmission of electricity produced from coal more efficient and cleaner," he said. "In addition, we will see more efficient solar energy cells." Uldrich added that Chevron Corp. (CVX) and Exxon Mobil (XOM) are "investing heavily in nanotechnology."

While some observers remain skeptical about nanotech's near-term future as a viable investment vehicle, 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 said. "But what distinguishes nanotech from things like the dot.com 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."

The applications of nanotech are so complex and varied as to render the term somewhat nebulous. That's because experts see it as an enabling technology that becomes part of the value chain. "You can't group it as one lump industry," noted one observer. "There is nano in health care, semiconductors, and basic materials." Uldrich says he compares the potential of nanotech to something as basic as electricity, which revolutionized society in the early 20th century, and then became something people took for granted in their daily lives. "You're not investing in a specific race horse… nano-science is the race course."