Tiny, Tiny Technology and Big Potential Profits

Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some cutting-edge nanotechnology stocks to your portfolio, the PowerShares Lux Nanotech ETF could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual fund cousins. This nanotechnnology ETF's expense ratio -- its annual fee -- is an exception, at 1.11%. The fund is very small, too, so if you're thinking of buying, beware of possibly large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.

It pays a 1.55% dividend yield, too, partly because among its many small holdings are some big, dividend-paying blue chips, such as Intel and IBM.

This ETF has performed ... well, rather dismally, significantly lagging the world market over the past three and five years. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.

Why nanotechnology?
There can be big profits to be had if you invest in explosive new technologies when they're still young. But it can be risky, too, as it can take quite a while for it to be clear which companies will win out over their rivals. Thus, this ETF's poor performance so far. Still, if you are interested in nanotechnology, investing via an ETF like this can keep you from putting too many eggs in just one or two baskets that don't become long-term winners. It's also quite reasonable to take a wait-and-see approach with nanotechnology.

Some nanotechnology-related companies had strong performances over the past year (in part because many are involved in activities other than nanotechnology, as well). Building materials company Headwaters surged some 257%, with its HTI division holding patents on a broad range of nanotechnology-based catalysts and catalytic processes. In the company's recent first quarter , operating income surged 37%, and revenue rose 9%. Headwaters bought assets of Kleer Lumber, and is expecting a boost from the recovering housing market.

Semiconductor equipment company Veeco Instruments gained 31%, though it may not profit as much from its LED business as expected, as organic LED technology grows more popular. Still, LED lighting is expected to grow by 32% by 2020. Canada's University of Waterloo recently bought Veeco equipment for its new nano lab.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. Biotechnology concern Vical advanced just 2%, developing vaccine technology, among other things, that it can license to others. At a recent conference, management noted the company's strong financial position, with ample cash and a dearth of debt.

Filtration specialist Polypore International rose just 1%, getting more downgrades than upgrades from Wall Street over the past year. Its revenue has been growing at an accelerating rate in recent years, but its free cash flow turned negative in 2011, raising a red flag. Reporting third-quarter results in October, management noted that the company was wrapping up lots of capital investments, which it expects will boost cash flow soon.

The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.

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The article Tiny, Tiny Technology and Big Potential Profits originally appeared on Fool.com.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Intel. The Motley Fool recommends Intel and Polypore International. The Motley Fool owns shares of Intel and International Business Machines. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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