Why Is General Motors in the PowerShares Lux Nanotech Portfolio? (ETF: PXN; Stock: GM)

An interesting and somewhat amusing observation about the composition of the PowerShares Nanotech ETF (PXN) from Dan Culloton at Morningstar: fund holdings include some stocks of dubious value as nanotechnology bets, including GM, IBM, GE and Hewlett-Packard. As David Roeder explained in his column in the Chicago Sun-Times:

[Culloton] finds some sector-chasing by ETF marketers to be baffling. A prime example is Wheaton-based PowerShares Capital Management LLC, which is assembling ETFs with the determination of Henry Ford. There’s one dealing with the nanotech industry (PXN), a hot area but apparently one without enough stocks in it. The managers had to include General Electric (GE) and General Motors (GM) in their holdings, and when were they considered in the nanotech business?

So why did the fund managers at PowerShares include these companies in their fund? Superficially, they probably needed additional stocks in order to comply with the ‘40 Act diversification requirements for mutual funds — e.g., mutual funds can’t have more than 25% of assets in any one stock, at least half the fund’s assets must be invested in even smaller positions, etc.

More subtly, I would add that by including large, diversified, non-nanotechnology companies like GE, the Powershares managers make the portfolio less volatile. Of course, this reduced volatility would be the result of reduced exposure to nanotech in general, which might seem to defeat the purpose of a pure play nanotechnology fund.

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