What is a 'Services Sector ETF'

The Services Sector ETF is an exchange-traded fund (ETF) that invests primarily in the consumer services or financial services sector of the economy.

BREAKING DOWN 'Services Sector ETF'

The services sector ETF profits or declines based on the results of an underlying group of companies that provide financing and services to consumers. Due to the wide variety of companies that fit this bill, this can refer to anything from Internet Service Providers (ISP’s) which would be designated consumer services, to financial institutions which provide financial services.

Consumer spending provides the bulk of growth in most economies. The expected returns from a services sector ETF would be directly tied to the health of the economy. In a down market, where there isn’t much consumer spending, these funds would not be as profitable. When the economy is in a state of growth, or what is also known as a bull market, these types of funds could be expected to yield a much higher rate of return.

When talking about the types of services in this sector, they are not limited by location and can also refer to credit card companies and experience-based companies, like hotels and theme parks.

Examples of Service Sector Companies

For an example of a consumer service company, consider Verizon. Their services range from cellular phones to cable television. While purchasing a cell phone through Verizon may be a tangible product, for the most part their products are service based and there is no physical product consumed.  

For an example of a financial service company, consider TD Bank. While the bank has brick and mortar locations that a customer can visit, the  customer consumes the financial service the bank provides. A customer can deposit money into a TD Bank account, receive secured and unsecured loans and open credit cards. The company also provides some financial advising. None of these services is a physical product the customer can hold onto.

Consumers are more likely to take advantage of the full range of products that companies offer when the economy is doing well. When it is not, and  people find themselves looking to cut costs to either make up for lost wages or increase savings, they will make financial sacrifices. Consumers may decide to do away with cable television or keep a more limited cellular package. They may also find themselves less likely to take advantage of personal loans or mortgages during these times.

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