Investments 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.
4 sectors that perform well during inflation
| Sector | Our Stock Pick | Link to invest |
|---|---|---|
| Energy | Devon Energy Corporation (DVN) | Buy on Interactive Brokers |
| Financials | Upstart Holdings (NasdaqGS: UPST) | Buy on Interactive Brokers |
| Real Estate | Preferred Apartment Communities (NYSE: APTS) | Buy on Interactive Brokers |
| Consumer Staples | Tyson Foods, Inc. (NYSE: TSN) | Buy on Interactive Brokers |
Finder survey: Which sectors would Canadians from different provinces consider buying stocks in?
| Response | Saskatchewan | Prince Edward Island | Ontario | Nova Scotia | Newfoundland and Labrador | New Brunswick | Manitoba | British Columbia | Alberta |
|---|---|---|---|---|---|---|---|---|---|
| Financials | 36.59% | 23.27% | 17.07% | 20% | 15% | 17.07% | 19.13% | 22.54% | |
| Information Technology | 31.71% | 50% | 28.4% | 21.95% | 15% | 25% | 21.95% | 24.04% | 25.35% |
| Energy | 29.27% | 33.33% | 31.36% | 19.51% | 40% | 30% | 26.83% | 27.87% | 32.39% |
| Health Care | 26.83% | 66.67% | 25.64% | 12.2% | 30% | 5% | 21.95% | 22.95% | 21.83% |
| None of the above | 21.95% | 21.1% | 29.27% | 30% | 35% | 29.27% | 15.3% | 23.94% | |
| Consumer Staples | 19.51% | 16.67% | 12.03% | 4.88% | 25% | 10% | 4.88% | 10.93% | 10.56% |
| Real Estate | 19.51% | 30.97% | 24.39% | 25% | 25% | 31.71% | 25.68% | 33.8% | |
| Utilities | 19.51% | 23.67% | 24.39% | 15% | 10% | 14.63% | 22.4% | 24.65% | |
| Industrials | 17.07% | 16.67% | 15.38% | 10% | 10% | 12.2% | 16.39% | 18.31% | |
| All of the above | 9.76% | 16.67% | 15.19% | 19.51% | 15% | 10% | 14.63% | 22.95% | 15.49% |
| Materials | 9.76% | 16.67% | 11.05% | 7.32% | 10% | 5% | 9.76% | 11.48% | 12.68% |
| Communication Services | 7.32% | 14.2% | 14.63% | 10% | 5% | 21.95% | 15.3% | 14.79% | |
| Consumer Discretionary | 4.88% | 16.67% | 5.92% | 9.76% | 5% | 10% | 2.44% | 6.56% | 7.04% |
Source: Finder survey by Pollfish of 1001 Canadians, January 2024
More stock picks from the 4 sectors
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 (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
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
First Trust Natural Gas ETF (NYSEArca: FCG)
- Tracks the ISE-Revere Natural Gas Index
- Top 3 holdings:
- DCP Midstream LP: 4.83%
- Occidental Petroleum: 4.78%
- ConocoPhillips: 4.33%
- 1Y performance: 92.56%
- YTD performance: 72.46%
- Expense ratio: 0.60%
- Yield: 1.40%
Invesco Dynamic Energy Exploration & Production ETF (NYSEArca: PXE)
- Tracks the Dynamic Energy Exploration & Production Intellidex Index
- Top 3 holdings:
- Continental Resources Inc: 6.35%
- ConocoPhillips: 5.09%
- Pioneer Natural Resources Co: 5.08%
- 1Y performance: 94.42%
- YTD performance: 77.96%
- Expense ratio: 0.63%
- Yield: 0.98%
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.
Dive deeper: Investing in financial stocks
Financial stocks and ETFs to watch
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
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
SPDR S&P Insurance ETF (NYSEArca: KIE)
- Tracks the S&P Insurance Select Industry Index
- Top 3 holdings:
- Goosehead Insurance: 2.41%
- Trupanion: 2.38%
- Athene Holding: 2.12%
- 1Y performance: -1.35%
- YTD performance: 1.35%
- Expense ratio: 0.35%
- Yield: 1.29%
Financial Select Sector SPDR Fund (NYSEArca: XLF)
- Tracks the Financial Select Sector Index
- Top 3 holdings:
- Berkshire Hathaway: 12.83%
- JPMorgan Chase & Co: 11.47%%
- Bank of America: 7.57%
- 1Y performance: -10.30%
- YTD performance: -7.15%
- Expense ratio: 0.10%
- Yield: 1.74%
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.
Dive deeper: Investing in real estate
Real estate stocks and ETFs to watch
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
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
Vanguard Real Estate Index Fund (NYSEArca: VNQ)
- Tracks the MSCI US Investable Market Real Estate 25/50 Index
- Top 3 holdings:
- Vanguard Real Estate II Index: 11.53%
- American Tower Corp: 7.49%
- Prologis: 5.62%
- 1Y performance: -14.79%
- YTD performance: -0.62%
- Expense ratio: 0.10%
- Yield: 2.19%
Schwab U.S. REIT ETF (NYSEArca: SCHH)
- Tracks the Dow Jones Equity All REIT Capped Index
- Top 3 holdings:
- American Tower: 8.77%
- Prologis: 6.31%
- Crown Castle International: 6.02%
- 1Y performance: -13.82%
- YTD performance: 1.33%
- Expense ratio: 0.07%
- Yield: 2.34%
Related: Mortgage stocks to watch out for
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.
Dive deeper: Investing in consumer staples stocks
Consumer staples stocks and ETFs to watch
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
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
Consumer Staples Select Sector SPDR Fund (NYSEArca: XLP)
- Tracks the Consumer Staples Select Sector Index
- Top 3 holdings:
- Procter & Gamble: 15.54%
- Coca-Cola: 9.88%
- PepsiCo: 9.63%
- 1Y performance: -4.24%
- YTD performance: 6.71%
- Expense ratio: 0.10%
- Yield: 2.21%
iShares US Consumer Staples ETF (NYSEArca: IYK)
- Tracks the Russell 1000 Consumer Staples RIC 22.5/45 Capped Index
- Top 3 holdings:
- Tesla: 16.89%
- Procter & Gamble: 10.38%
- Coca-Cola: 6.51%
- 1Y performance: 13.59%
- YTD performance: 1.67%
- Expense ratio: 0.41%
- Yield: 2.19%
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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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