While interest rates are currently at historic lows, experts predict an inevitable upswing to occur sometime later this year. And while the exact timetable is subject to debate, one thing is certain: surging rates demand careful attention when crafting an investment portfolio. This includes bolstering positions in short- and medium-term bonds, which are less sensitive to climbing rates, as well implementing a “bond ladder” to maximize cash and debt returns. (For more on this topic, see How To Protect Yourself From Rising Interest Rates). But a rising-rate environment also offers tantalizing opportunities within the equity space. A good starting point it examining the right sectors – ones that tend to benefit from rising rates.

Financials First

Boasting margins that actually expand as rates climb, financial entities like banks, insurance companies, brokerage firms and money managers tend to be good bets.

Rising rates tend to point to a strengthening economy. And that health usually means that borrowers have an easier time making loan payments and banks have fewer non-performing assets. It also means that banks can earn more from the spread between what they pay savers for savings accounts and certificates of deposit and what they can earn from highly-rated debt – Treasuries, for example.

Bank names that would fit nicely into any portfolio as rates rise include Bank of America Corp. (BAC), which has a substantial presence throughout the U.S.; JPMorgan Chase & Co. (JPM), with its robust operations in the U.S. and worldwide; Goldman Sachs Group Inc. (GS), with widespread investment banking and wealth management services; and Citigroup Inc. (C), which boasts more than 200 million customer accounts and does business in more than 160 countries. Bank of America, among the hardest-hit in the recession, saw its charge-offs drop by 49% in the fourth quarter of 2013 year over year. All banks should benefit from falling charge-offs, better credit ratios and lower loan loss reserves.

On the broker front, companies like E*TRADE Financial Corp. (ETFC), Charles Schwab Corp. (SCHW), and TD Ameritrade Holding Corp. (AMTD), all hold promise during times of escalating rates for similar reasons. A healthy economy sees more investment activity.

Insurance stocks, especially, tend to flourish as rates rise. In fact, the relationship between interest rates and insurance companies is linear and straightforward, meaning the higher the rate, the greater the growth. These same insurance providers – companies such as The Allstate Corp. (ALL), AmTrust Financial Services, Inc. (AFSI), and The Travelers Companies, Inc. (TRV), don’t fare as well in low interest rate climates because their underlying bond investments yield weak returns. Insurers, which have steady cash flows, are compelled to hold lots of safe debt to back the insurance policies they write.

The economic health dividend also applies to insurers; improving consumer sentiment means more car purchasing and improving home sales, which means more policy-writing.

Beyond Financials

Financials aren’t the only star performers in a rising rate environment; consumer discretionary stocks also can see a bump. Improving employment, coupled with a healthier housing market, makes consumers morel likely to splurge on purchases outside of the realm of consumer staples (food, beverages and hygiene goods). Manufacturers and sellers of kitchen appliances, cars, clothes, hotels, restaurants, movies and more benefit from the economic health dividend. Companies to keep an eye on include appliance maker Whirlpool Corp. (WHR), retailers Kohl's Corp. (KSS), Costco Wholesale Corp. (COST) and Home Depot, Inc. (HD), and travel facilitators like The Priceline Group Inc. (PCLN).

Finally, the industrials sector also benefits from the economic health dividend indicted by rising rates. Companies like Ingersoll-Rand PLC (IR) and manufacturers of heating, ventilation, and air conditioning (HVAC) systems, tend to outperform, as well as companies like PACCAR Inc. (PCAR), – a maker of heavy-duty trucks and truck parts. Such companies are among the first to benefit from any increase in housing starts.

The Bottom Line
You've adjusted your fixed income portfolio to account for rising rates. Now is the time to adjust your equity investments to favor companies that benefit from the economic health dividend indicated by rising rates. An excellent place to start is the financials sector. From there – as consumer confidence picks up and housing follows suit – consider durable-goods manufacturers, retailers, travel-related stocks and the industrials sector.

Related Articles
  1. Mutual Funds & ETFs

    3 ETFs to Consider Before an Interest Rate Hike

    Learn about potential impacts of the Federal Reserve boosting interest rates and three ETFs that can help you capitalize on the perceived December increase.
  2. Bonds & Fixed Income

    How To Earn The Most From CDs When Interest Rates Are Low

    Certificates of deposit might not seem like a good place to keep your money when interest rates are low, but they do offer security and stability. And with laddering and studying promotional ...
  3. Bonds & Fixed Income

    How To Protect Yourself From Rising Interest Rates

    Today's historically low interest rates have just one way to go. How should you prepare for their inevitable rise?
  4. Bonds & Fixed Income

    Boost Bond Returns With Laddering

    If you want a diversified portfolio and steady cash flow, check out this fixed-income strategy.
  5. Home & Auto

    Timeless Ways To Protect Yourself From Inflation

    Inflation is a natural part of modern life - but there are some ways to cover your assets.
  6. Bonds & Fixed Income

    The Top 5 High Yield Bond Funds for 2016

    Learn about mutual funds and ETFs that invest in high-yield bonds. Read about the risks and rewards associated with investing in high-yield bonds.
  7. Stock Analysis

    Can Jet.com Affect the Costco Model?

    Find out how Jet.com changed its business model to take on competitors such as Costco, Sam's Club and Amazon. Early success shows the company is succeeding.
  8. Wealth Management

    The Most Important Factors that Affect Mortgage Rates

    Discover what the most important factors are that affect mortgage interest rates. Factors range from inflation and economic growth to Federal Reserve activity, .
  9. Professionals

    Common Interview Questions for Bank Tellers

    Discover some of the most common questions asked of applicants for bank teller positions and the best answers with which applicants can respond.
  10. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  1. Are secured personal loans better than unsecured loans?

    Secured loans are better for the borrower than unsecured loans because the loan terms are more agreeable. Often, the interest ... Read Full Answer >>
  2. Does QVC accept debit cards?

    QVC accepts debit card payments as one of its many payment options. The company, which is the world’s leading video and e-commerce ... Read Full Answer >>
  3. Where can you buy NetSpend reload packs?

    You can only purchase NetSpend reload packs at Giant Eagle, Albertsons, Roundy's and Pathmark supermarkets. NetSpend cards ... Read Full Answer >>
  4. Does an FHA loan require a down payment?

    Federal Housing Administration (FHA) loans require down payments, which can be as low as 3.5% of the total purchase price ... Read Full Answer >>
  5. Does QVC charge sales tax?

    QVC, an American TV network, is registered with states to collect sales or use tax on taxable items. QVC is also required ... Read Full Answer >>
  6. Do FHA loans have closing costs?

    Because Federal Housing Administration (FHA) loans are provided by financial institutions, taking out an FHA loan entails ... Read Full Answer >>

You May Also Like

Trading Center