10 Stocks and Bonds That Will Profit From the Fed Rate Hike

By Tim Lemke on 17 December 2015 0 comments

The Federal Reserve finally did what it's been hinting at for some time, and raised the target on its benchmark rate by a quarter of a percentage point. It's the first interest rate hike after spending much of the last decade with interest rates near zero.

Interest rates are still going to be historically quite low, but some investments may decline in value in the short term. After all, it's the low interest rate environment that has partly fueled the rise in stock prices in recent years.

That said, it's still very possible to profit even as interest rates go up. There are some market sectors that love higher rates, and in general, a rise in rates is a signal from the Fed that the nation's economy is healthy. (See also: This Is How Much the Fed's Interest Rate Hike Might Cost You)

Here are ten investments that might respond well as interest rates go up.

1. SPDR S&P Regional Bank ETF [NYSE: KRE]

When interest rates rise, small banks do quite well because more people are willing to increase their cash holdings. This ETF counts many strong small banks in its portfolio, including Bank of the Ozarks and Great Western Bancorp. This ETF has seen a return of more than 13% over the last year, suggesting that the anticipation of higher rates may already be baked into the price. But it's still worth buying.

2. Wells Fargo [NYSE: WFC]

If smaller banks aren't your thing, then take a look at some big banks. Billionaire investor Warren Buffett owns more shares of Wells Fargo than any other company. New loans made by the bank will benefit from the higher rates, as will any existing variable rate loans. Other big banks worth a look include US Bancorp and BNY Mellon.

3. Schwab Short-Term U.S. Treasury ETF [NYSE: SCHO]

The conventional wisdom is that a hike in interest rates make long-term bonds less attractive, but short-term bonds perform well. Consider that the yield on a two-year treasury note hit a year high recently. Charles Schwab reported that during the three periods when the Fed rose rates since 1990, short-term bonds were the only sector that saw increases each time. This ETF from Schwab has some of the lowests fees on the market, so it's likely a good buy if you're interested in fixed income investments. The iShares Short Treasury Bond ETF is also well regarded.

4. Apple [NYSE: APPL]

It's the biggest company in the world. It has a very healthy balance sheet. In a time of raising rates and general uncertainty, it's good to hang with companies that have solid margins, lots of cash, and low volatility. Any blue chip stock with a long track record of steady growth is a good buy in this environment.

5. Alphabet [NYSE: GOOGL]

Another one of the largest and most stable companies in the world, most likely unaffected by a rise in interest rates. Investing in Google's parent company can help keep you insulated from any market uncertainty over the next few months.

6. MetLife [NYSE: MET]

There are few sectors clamoring for an interest rate hike more than life insurers. These companies rely on interest income to boost their margins, so they generally have not been fans of the low interest rate environment. MetLife is the a largest company in this sector. Prudential and New York Life are also worth a look.

7. Accushares VIX Index ETF [NYSE: VXUP]

It's not entirely clear how the markets will react to the news of the interest rate bump, but most observers predict some amount of volatility in the short term. You can capitalize on that volatility by buying shares of this ETF that is based on the most common volatility index. It's an esoteric product, and I wouldn't invest my life savings into it, but it may be one way to capitalize on investor uncertainty.

8. Starbucks [NYSE: SBUX]

If the Fed is raising interest rates, it's sending a signal that it believes the economy is in good shape. And a strong economy means people are doing well enough to afford discretionary items, including that morning cup of coffee. Starbucks is a leader in the restaurant/food area, and should benefit from a strong economy overall.

9. Mastercard [NYSE: MA]

Goldman Sachs put this credit card company on its list of "quality" stocks worth buying in advance of a rate hike, and its reasoning is sound. If the economy is strong in the Fed's eyes, then it's strong enough for people to be buying more goods and services. Companies like Mastercard do better when people go shopping.

10. Chipotle Mexican Grill [NYSE: CMG]

Shares of this burrito eatery have tumbled in the last few months, in part due the company being linked to cases of e.coli around the country. But assuming that the cases aren't indicative of a larger problem with the restaurant, this is a well-regarded company with a solid balance sheet. Chipotle shares should be poised for a rebound with the Fed showing confidence in the nation's economy.

Will your portfolio be helped or hurt by the Fed's recent rate increase?

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