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Sectors and stocks that might protect you from rising interest rates

Here are some investment ideas that could do well despite rising interest rates.

Rising interest rates can signal a dip in the stock market as more people turn to savings instead of stocks to grow their wealth and companies churn out less profit due to paying higher interest on debt. But which sectors and stocks do well when rates are on the rise? Here are the stocks you should keep an eye on during rate hikes.

What should investors look for during rate hikes?

Not all sectors will perform well when interest rates are rising, so investors shouldn’t expect broad equity market returns.

Investing during periods of rising interest rates can be successfully done by shifting toward companies and sectors that tend to do well in the higher rates environment, such as energy, financials, real estate and consumer staples.

Companies that have a large cash balance and a track record of consistent dividend payouts tend to perform well during rising interest rates. High dividend stocks in the US outperformed the S&P 500 in 7 out of the 10 rising interest rate periods that occurred since 1960, according to data from Global X Management Company.

Here are 4 sectors and stocks that may be worth watching when rates are heading up.

Energy

The energy sector has historically been the best performing sector leading up to a peak in inflation, according to data from Refinitiv.

In fact, the energy sector was the best-performing sector in the S&P 500 in 2021. According to financial information and analytics company S&P Global, energy was the only sector that didn’t post a loss in January 2022.

Underproduction in the energy sector can drive up prices. When crude oil prices rise, oil stock prices tend to follow, because a portion of oil companies’ earnings comes from the amount of oil that is sold.

Check out our guides on the best oil stocks in Canada and the United States for more information on stocks to watch.

Energy stocks and ETFs to watch

Devon Energy Corporation logo

Devon Energy Corporation (DVN)

Devon Energy Corporation is an independent energy company that primarily engages in the exploration, development and production of oil, natural gas and natural gas liquids in the United States.

  • Market cap: C$50.833 billion
  • YTD performance: 74.85%
  • 1 Year performance: 143.27%
  • 5 Year performance: 261%
  • P/E Ratio: 14.46
  • Headquarters: United States
Buy DVN on CIBC Investor's Edge

Halliburton Company logo

Halliburton Company (NYSE: HAL)

Halliburton Company provides energy products and services around the world. It assist customers with hydrocarbons location, geological data management, drilling and formation evaluation, constructing and completing wells and optimizing products throughout the life of customers’ assets.

  • Market cap: C$37.838 billion
  • YTD performance: 83.43%
  • 1 Year performance: 69.70%
  • 5 Year performance: 231%
  • P/E Ratio: 24.29
  • Headquarters: United States
Buy HAL on CIBC Investor's Edge

First Trust logo

First Trust Natural Gas ETF (NYSEArca: FCG)

  • Tracks the ISE-Revere Natural Gas Index
  • Top 3 holdings:
    1. DCP Midstream LP: 4.83%
    2. Occidental Petroleum: 4.78%
    3. ConocoPhillips: 4.33%
  • 1Y performance: 92.56%
  • YTD performance: 72.46%
  • Expense ratio: 0.60%
  • Yield: 1.40%
Buy FCG on CIBC Investor's Edge

Invesco logo

Invesco Dynamic Energy Exploration & Production ETF (NYSEArca: PXE)

  • Tracks the Dynamic Energy Exploration & Production Intellidex Index
  • Top 3 holdings:
    1. Continental Resources Inc: 6.35%
    2. ConocoPhillips: 5.09%
    3. Pioneer Natural Resources Co: 5.08%
  • 1Y performance: 94.42%
  • YTD performance: 77.96%
  • Expense ratio: 0.63%
  • Yield: 0.98%
Buy PXE on CIBC Investor's Edge

Financials

Financial stocks generally benefit from a strong economy and higher rates. For banks, higher interest rates mean more money paid out to customers who have savings accounts. But it also means even more profit in the form of interest paid on loans and other debt instruments. Check out the best Canadian bank stocks here.

Similarly, brokerage firms earn money from the interest earned on cash balances held in client accounts and from lending client money elsewhere.

Insurance companies make a profit off the spread between what it owes policyholders versus what it can make with its investments. Insurance companies invest a portion of premiums in the bond market, and when rates are high, it makes more money off that spread.

All this means that the financial sector, which was among the market’s top-performing sectors in 2021, may see growth amid rising rates. That being said, some data suggests that financials may underperform in the year leading up to a peak in inflation.

Investing in financial stocks

Financial stocks and ETFs to watch

Upstart logo

Upstart Holdings (NasdaqGS: UPST)

Upstart Holdings, Inc. is a cloud-based artificial intelligence (AI) lending platform based in the United States. Its platform aggregates consumer demand for loans and connects it to its network of the company’s AI-enabled bank partners.

  • Market cap: C$4.115 billion
  • YTD performance: -67.92%
  • 1 Year performance: -70.41%
  • 5 Year performance: N/A
  • P/E Ratio: 29.44
  • Headquarters: United States
Buy UPST on CIBC Investor's Edge

Wells Fargo logo

Wells Fargo & Company (NYSE: WFC)

Wells Fargo & Company is a diversified financial services company that provides banking, investment, mortgage and consumer and commercial finance products and services in the United States and internationally. It operates through 4 segments: Consumer Banking and Lending, Corporate and Investment Banking, Commercial Banking and Wealth and Investment Management.

  • Market cap: C$170.523 billion
  • YTD performance: -6.59%
  • 1 Year performance: -4.56%
  • 5 Year performance: 114%
  • P/E Ratio: 9.28
  • Headquarters: United States
Buy WFC on CIBC Investor's Edge

State Street Global Advisors SPDR logo

SPDR S&P Insurance ETF (NYSEArca: KIE)

  • Tracks the S&P Insurance Select Industry Index
  • Top 3 holdings:
    1. Goosehead Insurance: 2.41%
    2. Trupanion: 2.38%
    3. Athene Holding: 2.12%
  • 1Y performance: -1.35%
  • YTD performance: 1.35%
  • Expense ratio: 0.35%
  • Yield: 1.29%
Buy KIE on CIBC Investor's Edge

State Street Global Advisors SPDR logo

Financial Select Sector SPDR Fund (NYSEArca: XLF)

  • Tracks the Financial Select Sector Index
  • Top 3 holdings:
    1. Berkshire Hathaway: 12.83%
    2. JPMorgan Chase & Co: 11.47%%
    3. Bank of America: 7.57%
  • 1Y performance: -10.30%
  • YTD performance: -7.15%
  • Expense ratio: 0.10%
  • Yield: 1.74%
Buy XLF on CIBC Investor's Edge

Real estate

Even though rising interest rates can increase borrowing costs for real estate investment trusts (REITs), REITs can benefit from rate hikes because it typically increases real estate owners’ ability to raise rental prices and pass that income on to shareholders.

Behind energy, real estate was the market’s second-best performing sector in 2021. According to investment management firm Cohen & Steers, REITs over the last 3 decades have had a 10.8% annualized return in periods of rising rates and positive economic growth.

Investing in real estate

Real estate stocks and ETFs to watch

Preferred Apartment Communities logo

Preferred Apartment Communities (NYSE: APTS)

Upstart Holdings, Inc. is a cloud-based artificial intelligence (AI) lending platform based in the United States. Its platform aggregates consumer demand for loans and connects it to its network of the company’s AI-enabled bank partners.

  • Market cap: C$1.622 billion
  • YTD performance: 38.21%
  • 1 Year performance: 142.10%
  • 5 Year performance: 98%
  • P/E Ratio: N/A
  • Headquarters: United States
Buy APTS on CIBC Investor's Edge

Bluerock Residential logo

Bluerock Residential Growth REIT (NYSE American: BRG)

Bluerock Residential Growth REIT focuses on developing and acquiring a diversified portfolio of institutional-quality highly amenitized live/work/play apartment communities in demographically attractive knowledge economy growth markets. The Company is included in the Russell 2000 and Russell 3000 indices.

  • Market cap: C$957.142 million
  • YTD performance: 1.17%
  • 1 Year performance: 176.68%
  • 5 Year performance: 97%
  • P/E Ratio: N/A
  • Headquarters: United States
Buy BRG on CIBC Investor's Edge

Vanguard logo

Vanguard Real Estate Index Fund (NYSEArca: VNQ)

  • Tracks the MSCI US Investable Market Real Estate 25/50 Index
  • Top 3 holdings:
    1. Vanguard Real Estate II Index: 11.53%
    2. American Tower Corp: 7.49%
    3. Prologis: 5.62%
  • 1Y performance: -14.79%
  • YTD performance: -0.62%
  • Expense ratio: 0.10%
  • Yield: 2.19%
Buy VNQ on CIBC Investor's Edge

Charles Schwab logo

Schwab U.S. REIT ETF (NYSEArca: SCHH)

  • Tracks the Dow Jones Equity All REIT Capped Index
  • Top 3 holdings:
    1. American Tower: 8.77%
    2. Prologis: 6.31%
    3. Crown Castle International: 6.02%
  • 1Y performance: -13.82%
  • YTD performance: 1.33%
  • Expense ratio: 0.07%
  • Yield: 2.34%
Buy SCHH on CIBC Investor's Edge

Consumer staples

When interest rates go up, people may be more attracted to saving than spending. Rising costs can cause people to think twice about splurging on big ticket items. But people still need to spend on staples like food, beverages and hygiene products.

Companies that sell these items also battle rising inflationary costs but can usually pass on such costs to consumers.

A recent report from investment management company Hartford Funds shows that, along with energy, equity REITs and financials, the consumer staples sector has outperformed every other sector during periods of rising inflation between 1973 and 2021.

As interest rates go up to battle rising costs, consider investing in stocks that have higher pricing power, as they are able to increase their prices with inflation better than some other industries.

Investing in consumer staples stocks

Consumer staples stocks and ETFs to watch

Tyson Foods logo

Tyson Foods, Inc. (NYSE: TSN)

Tyson Foods, Inc. is a global food company that operates through 4 segments: Beef, Pork, Chicken and Prepared Foods. It sells products to grocery retailers and wholesalers, meat distributors, warehouse club stores, industrial food processing companies, chain restaurants, live markets, international export companies and domestic distributors.

  • Market cap: C$31.603 billion
  • YTD performance: 0.29%
  • 1 Year performance: 11.14%
  • 5 Year performance: 68%
  • P/E Ratio: 7.87
  • Headquarters: United States
Buy TSN on CIBC Investor's Edge

Coca-Cola logo

The Coca-Cola Company (NYSE: KO)

The Coca-Cola Company is a beverage company that manufactures, markets and sells various nonalcoholic beverages worldwide. It operates through a network of independent bottling partners, distributors, wholesalers and retailers as well as through bottling and distribution operators.

  • Market cap: C$272.977 billion
  • YTD performance: 6.35%
  • 1 Year performance: 11.97%
  • 5 Year performance: 58%
  • P/E Ratio: 26.57
  • Headquarters: United States
Buy KO on CIBC Investor's Edge

State Street Global Advisors SPDR logo

Consumer Staples Select Sector SPDR Fund (NYSEArca: XLP)

  • Tracks the Consumer Staples Select Sector Index
  • Top 3 holdings:
    1. Procter & Gamble: 15.54%
    2. Coca-Cola: 9.88%
    3. PepsiCo: 9.63%
  • 1Y performance: -4.24%
  • YTD performance: 6.71%
  • Expense ratio: 0.10%
  • Yield: 2.21%
Buy XLP on CIBC Investor's Edge

iShares by BlackRock logo

iShares US Consumer Staples ETF (NYSEArca: IYK)

  • Tracks the Russell 1000 Consumer Staples RIC 22.5/45 Capped Index
  • Top 3 holdings:
    1. Tesla: 16.89%
    2. Procter & Gamble: 10.38%
    3. Coca-Cola: 6.51%
  • 1Y performance: 13.59%
  • YTD performance: 1.67%
  • Expense ratio: 0.41%
  • Yield: 2.19%
Buy IYK on CIBC Investor's Edge

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At the time of publication, Matt Miczulski owned shares of WFC and HAL.


Disclaimer: This information should not be interpreted as an endorsement of futures, stocks, ETFs, options or any specific provider, service or offering. It should not be relied upon as investment advice or construed as providing recommendations of any kind. Futures, stocks, ETFs and options trading involves substantial risk of loss and therefore are not appropriate for all investors. Trading forex on leverage comes with a higher risk of losing money rapidly. Past performance is not an indication of future results. Consider your own circumstances, and obtain your own advice, before making any trades.

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