Yiannis and I have already sent out the October issue of Global ETF Profits, but we wanted to inform you about two additional opportunities that we’ve added to our Long-Term Growth and Short-Term Opportunities Portfolios.

Big Potential in Tiny Materials

Technological innovation has fundamentally changed the way we live our lives. If you consider the major advances of the last hundred years–the automobile, the television, the personal computer, and the Internet–they’ve all arrived in roughly 20-year intervals.  This means that the world’s next great technology is waiting to burst onto the scene.

Nanotechnology–the study and development of matter that can be controlled at the molecular level–is likely to be the disruptive technology of the new century. While few of us may be familiar with the technology, it’s already used in more than 500 consumer products sold around the world, from anti-odor socks and stain resistant clothing, to anti-bacterial home fixtures and insulating paint. Nanotechnology is even found in some food products.

But these applications are only the tip of the iceberg. Researchers believe that over the coming years nanotechnology can be harnessed to develop drug delivery systems which would target cancer cells, reducing or even eliminating the need for systemic chemotherapy. Nanotechnology could improve water filtration and desalination processes. It can help us produce more efficient batteries and reduce energy consumption. It could revolutionize the computer industry by exponentially enhancing the performance of memory storage devices. The potential of nanotechnology seems to be limited only by what we can imagine.

Given the diversity of the work occurring in the field, and the fact that the industry is still in a nascent stage, it’s difficult to guess which firms will succeed and which will fail. Nanotechnology may have almost unparalleled potential, but if you’re like most Americans, the odds are that you’ve heard next to nothing about this coming technological breakthrough. The obscurity of the field, combined with the blistering pace of its development, means that innovative products could be eclipsed before they gain traction in the market.

Nonetheless, nanotechnology will be the breakthrough growth industry, and it would be folly for investors to neglect it in their portfolios.

This is exactly the type of situation for which exchange-traded funds (ETF) were created.

PowerShares Lux Nanotech Portfolio (NYSE: PXN) provides broad-based passive exposure to the entire nanotechnology value chain with a portfolio of 20 to 25 positions. The holdings range from outfits providing seed financing for nanotech companies, to firms involved in the development and production of the industry’s raw materials, to companies that develop nanotech applications.

In addition to diversification across business types, the fund also spreads its exposure across large established companies and small development-stage firms. The portfolio includes well-known names such as 3M (NYSE: MMM), which uses nanotechnology in the development of consumer products, and Hewlett-Packard (NYSE: HPQ), which is finding uses for nanotechnology in its IT applications. The ETF also holds stakes in small firms such as medical diagnostic platform developer Nanosphere (NSDQ: NSPH), and Shengda Tech (NSDQ: SDTH), a Chinese manufacturer that produces nanotech-enabled chemical additives.

While the portfolio is a bit concentrated, it does provide derivative exposure to an additional 30 nanotechnology operations via its position in Harris & Harris Group (NSDQ:TINY), a publicly-traded venture capital firm that specializes in nanotech investment.

PowerShares Lux Nanotech Portfolio is obviously a niche fund. But it charges a reasonable annual expense ratio of 0.70 percent and its market price tends to cleave fairly closely to net asset value without drifting toward extreme premiums or discounts. Its average daily trading volume of about 25,000 shares indicates that institutional traders are taking advantage of the ETF’s share creation/redemption process–a major vote of confidence for the fund.

Offering broad exposure to the most attractive growth industry of the decade, PowerShares Lux Nanotech Portfolio is a new addition to our Growth Portfolio and a buy up to 13.

Grab a Tiger by the Tail

China is arguably the most important emerging market (EM) for investors. It accounts for about 33 percent of the EM universe as measured by market capitalization, and consequently figures prominently in EM funds. Nonetheless, your China exposure may not be as complete as you’ve been led to believe.

The broad Chinese market is nearly impossible for foreign investors to tap into because of the central government’s tight restrictions on investment and foreign capital. In fact, only about 28 percent of China’s equity market is open to foreigners. Most China-focused funds invest in US-listed American Depositary Receipts, the few local B-Shares open to foreign investors, or H-Shares, the Hong Kong listings of Chinese stocks. That limited access leaves funds heavily concentrated in just a few sectors and also increases correlations to the broader global markets.

Nonetheless, there’s a bevy of China-focused ETFs on the market, all of which track specialty indexes rather than local indexes.

Van Eck Global moved to address that issue on Thursday with the launch of Market Vectors China ETF (NYSE: PEK).

The fund will track the CSI 300 Index, a local market capitalization-weighted index designed to capture the 300 largest, most liquid shares traded on the Shanghai and Shenzhen bourses. It is also designed to exclude shares that exhibit higher-than-average volatility or suspicious signs of price manipulation. Market Vectors China ETF will be the first US-based ETF offering exposure to the index, and will allow American investors to tap into the broader Chinese markets.

Market Vectors China ETF faces the same restrictions as other foreigners seeking to buy Chinese A-shares, so it will replicate the performance of the index by using swap agreements and other derivatives. That strategy may change in the future however.

While the broad Chinese market is all but impossible for foreigners to access, the authorities do have a mechanism by which Qualified Foreign Institutional Investors (QFII) can be licensed to trade a set quota of A-shares in the local markets.

A number of investment banks operating in China hold QFII licenses, but investment companies that offer ETFs don’t qualify for QFII status. As a way to sidestep that restriction, the ETF’s advisor Van Eck Associates has applied for a QFII designation. The move would greatly benefit ETF investors should Van Eck Associates be awarded a QFII license.

While the licensing process will likely be slow, I believe that the ETF is worth owning as it’s currently constructed. The CSI 300 Index is more than 50 percent off its pre-crisis highs and has fallen by almost seven percent year to date. Yiannis and I are expecting a rally in the fourth quarter or early next year as Chinese economic growth continues to outpace the global norm.

Market Vectors China ETF is the newest addition to our Short-Term Opportunities Portfolio as a buy up to 50.