ETFs for the Services Side of the Economy

Two consecutive quarters of negative GDP? Survey says... we're not going to see it.

The fact that we are unlikely to see a definitive recession won't please the doomsayers in the media. It certainly won't cheer up the "trolls" who pound the blogosphere with brimstone.

Granted, the U.S. faces exceptionally formidable challenges in real estate due to the credit crunch. And we have only begun to tackle the oil calamity that is killing "Triple A" (Auto/Air/Appliances).

Yet there's surprising strength on the non-manufacturing side (i.e., services). Strip out housing and auto, and GDP growth was 3.1% in Q4 of '07. Do the same for Q1 '08... and GDP was 3.5%. Not too shabby.

Of course, one CANNOT ignore products as if we are merely a society of lawyers, doctors, accountants, contractors, plumbers and consultants. The "housing bust" and the "contraction in consumer goods" have been devastating. (See my "Bear of a Time" feature on common sense definitions for a bad economy.)

Still, what if an investor chose ETFs that had a services slant? Would the portfolio capitalize on the economic strength? Or, conversely, would the exposure to any stock assets be harmful in the short run?

I decided to test the services waters. I put together a simple portfolio of 6 services-based ETFs from across the services spectrum, excluding financial services. I cherry-picked... if you will.

And, in a highly UNscientific manner, the evenly weighted portfolio outperformed the S&P 500. Here are the ETFs (YTD Through 6/6):

Oil Services HOLDR (OIH)	12.20%
Market Vectors Environ Services (EVX)	9.10%
First Trust ISE Water Index (FIW)	5.70%
PowerShares Cleantech Portfolio (PZD)	0%
Vanguard Telecom Services (VOX)	-9.30%
HealthShares Patient Care Services (HHB)	-9.90%
Services-Based ETF Return for 2008	1.30%
S&P 500 2008 Return (Through 6/6)	-7.30%

Once again, this was not an exhaustive study... far from it! Nevertheless, my curiosity about GDP strength emanating from the services side led me to look at some options.

There's hardly any surprise that Oil Services has been magnificent. Anything that has to do with oil has been as good as gold. (Scratch that... much better than gold!)

What's more, the 18 companies in the Oil Services camp are hardly pure service sector plays. Naturally, these companies provide engineering, information management and project management solutions. But the line is blurred with respect to oil production and oil services.

Environmental Services and First Trust ISE Water Services are far easier to grasp. The former deals with waste and the latter deals with drinkable water and/or wastewater. "Green" ETFs may be profitable after all.

One of my favorites is Powershares "Cleantech" which deals with the efficient use of natural resources. You may wish to consult my previous column on PZD, "Part Infrastructure, Part Green, Part Mid-Cap Growth."

The sour-sacks of the bunch include Telecom Services and Patient Care Services. With the current fears surrounding health care reform, it's not difficult to understand why health-related ETFs are struggling.

Telecom Services, on the other hand, just can't seem to shake the consumer-is-not-spending hangover. Indeed, it has traveled a similarly woeful path as other discretionary spending ETFs.

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.