What to Invest in When Interest Rates Rise

Rising interest rates can wreak havoc on an investor’s portfolio. But there are moves that investors can make to protect their investments against loss and generate profits. Here’s what to invest in when interest rates rise. A financial advisor could help you put an investment plan together for when interest rates go up.

Finding the right investments in a changing environment can be a challenge. Some investments react negatively to rising interest rates, while others benefit or at least retain their value. Here are seven investment moves you should consider:

Banks and brokerage firms. Banks and brokerage firms benefit from rising interest rates. They charge interest to clients who borrow money and pay interest on deposits from clients. Their net interest margin is the difference between what borrowers pay and what they pay on deposits. When interest rates rise, financial companies get more profitable as net interest margin increases

Treasury Inflation-Protected Securities (TIPS). The federal government issues Treasury Inflation-Protected Securities (TIPS) bonds with interest rates based on current CPI inflation statistics. These bonds are issued with terms of five, 10, and 30 years and your balance increases every six months as interest earned is added to your balance. Even though you won’t receive the interest until the bond matures, you must pay federal taxes on the interest earned each year. On the plus side, interest payments are exempt from state and local income taxes.

Healthcare and technology companies. Companies in these industries tend to reinvest their profits in growth opportunities instead of paying out dividends. The innovation from these investments leads to outsized performance over other sectors of the economy. Past performance shows that these industries yield higher average gains during periods of rising interest rates than the rest of the S&P 500 index.

Lock in low fixed-rate debt. Borrowing at fixed rates is a good opportunity when interest rates rise. Investors can use this interest rate arbitrage to generate higher returns and eliminate interest rate risk in their portfolios. And if investors have any variable interest rate debt, locking in low, fixed-rate debt ensures that they maintain disposable income to invest in other opportunities.

Short-term or floating-rate bonds. When interest rates rise, it can devastate the value of long-term bonds. Investors who want to maintain an allocation of bonds in their portfolios should embrace short-term and floating-rate bonds. The effect of rising interest rates is minimal on short-term bonds because they mature very quickly. And floating-rate bonds benefit from rising rates because their interest rates also increase during these periods.

Secure long-term supply contracts. Rising interest rates often result in higher costs for labor, supplies, raw materials, and other products you need to run your business. If you own a business, consider locking in long-term supply contracts with fixed prices. They’ll insulate you from the effects of inflation and provide guaranteed costs that you can plan your business around.

Rental real estate. Rental property investors are able to increase rental rates as inflation rises. This provides an opportunity for real estate investors to benefit from rising values and higher rents. If you’ve secured a long-term, fixed-rate mortgage, the higher rental income yields a more profitable rental property.

Bottom Line

Although interest rates are rising, there are still investment opportunities available to profit in this market. These investments offer ideas for what to invest in when interest rates rise. Examine your portfolio and consult with your financial advisor to determine if you need to make any moves with your investments.

Tips for Investing in a Rising Rate Environment

Inflation and higher interest rates can have profound effects on retirement planning. Use our inflation calculator to understand how increases in your monthly expenses change how much money you’ll need in retirement.
A financial advisor will help you pick the best financial moves for your portfolio when interest rates go up. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.