Definition and Examples of the Service Sector
The service sector spans companies and businesses engaged in offering services to customers, other businesses, and even governments. Every time you go to the doctor and receive an exam or stay in a hotel, you’re utilizing a service. The service sector is also known as the tertiary sector. Stocks in the service sector comprise shares in companies involved in the service industry—from transportation or distribution to education and social work. The service industry is wide-spanning, but a few companies in this sector include H&R Block (HRB), Verizon (VZ), and Charles Schwab (SCHW).
How the Service Sector Works
Companies in the service sector are concerned with producing services rather than goods. This industry spans across many sub-industries, including:
LogisticsRetailTransportationFoodHospitalityReal estateTechnologyEducationComputer servicesHealthUtilitiesSocial workCommunicationsRecreationMedia
For example, the tourism and travel industry sees more demand for travel during certain seasons or months. On the other hand, fewer people eat out or spend on recreational activities in times of an economic slowdown.
Pros and Cons of Investing in the Service Sector
Pros Explained
Access to a diverse set of companies: Since the service sector spans many industries, investing in a variety of service subsectors can help you diversify your portfolio with exposure to a broad array of stocks.
Cons Explained
Need for services change and evolve: On the downside, while services are very in demand, the types of services needed often change with time. For instance, there might have been a time when cable television was where you caught up on shows, but now, a lot of people use streaming services. If you invest in a service that goes out of demand, you could lose money.Vast: The service sector spans many subsectors and can be hard to fully research. Unless you can become well-versed in each subsector of the industry, it might make more sense to directly invest in the subsector you know the most about; for example, investing directly in technology companies rather than the entire tertiary sector.
What It Means for Individual Investors
People rely heavily on the service sector for transportation needs, health services, educational programs, technological advances, and much more. The service sector is ingrained in daily life. Given that the sector is driven by consumer demand, when you use services, you are actually helping the companies in the service sector and, in turn, helping your investments in them. However, if you stop using certain services, you’re taking that revenue away from the company. For example, if you’re cutting the cord with your cable television provider and opting for a streaming service, you might wonder if others would do that, too. If that is a trend, you should watch out before putting your money in the shares of a cable company.
How To Invest in the Service Sector
You can invest in all the subsectors that make up the service sector or pick the subsectors that best suit your investing needs. One of the big benefits and challenges of the service sector is how vast it is. Because it spans a large spectrum of companies, you can hedge risks of specific subsectors by investing in the overall sector. Different subsectors are impacted by different factors. For example, communications companies are more sensitive to economic cycles, while utility companies tend to be more stable investments. Financial service firms tend to do better in the beginning of business cycles while health care companies fare better in the late stages of business cycles. You can invest in this sector with exchange-traded funds (ETFs) such as health care ETFs or insurance sector ETFs. You could also gain exposure to the service sector by investing in sectoral funds or directly buying shares of companies in the service sector. To buy funds or ETFs, you may approach a fund company like Vanguard that offers a variety of service sector funds and allows you to purchase the fund directly. Alternatively, you can invest in funds or individual companies with a brokerage account using platforms such as TD Ameritrade or Robinhood.
