Nanotech: Huge Focus on a Small Science

Nanotechnology, the practice of manipulating matter on the atomic scale, may demand an exact science. But so far, nanotech investing has not.

A few short years after Wall Street's first flirtation with the science routinely touted as the next big wave of innovation, there is more misunderstanding about nanotechnology among investors -- and more confusion than information. And it's not just the little guys who get befuddled; it's also big investment banks like Merrill Lynch.

On April 1, 2004, Merrill and its highly respected tech analyst, Steve Milunovich, launched the Merrill Lynch Nanotech Index, injecting a jolt of volatility into many of the 25 small-cap components. A week later, the firm quietly swapped out Cabot Microelectronics(CCMP Quote) for Cabot Corp.(CBT Quote). A week after that, Merrill pulled six companies out of the index after some of them -- including Applied Film(AFCO Quote), Emcore(EMKR Quote) and Three-Five Systems(TFS Quote) -- complained that they didn't see themselves as nanotech plays. It also added three others.

In one of the most eloquent admissions of error in the history of analyst reports, Merrill wrote, "Given the difficulty in defining nanotechnology, along with the dynamic nature of this emerging technology, we believe these changes will enhance our index, making it more useful to the marketplace." ...