3 Ways to Protect Your Portfolio (and Profit) from Interest Rate Hikes

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Last month, the U.S. Federal Reserve announced it would raise interest rates for a third time this year and intended to initiate a fourth raise in the near future.

The Fed’s aggressive interest rate tactics rattled investors who believe regular interest rate hikes could put a sizable dent in their portfolios.

After all, it’s been a long time since investors have had to worry about higher interest rates.

Between 2009 and 2015, the Federal Reserve held interest rates under 0.5% in an effort to lower borrowing costs and spur economic growth.

Since 2015, the Fed has gradually raised rates, pushing the rate to 2.25% in September. And it doesn’t look like the Fed intends to stop the increases anytime soon – December’s increase is expected to push the national rate to 2.5%.

Higher interest rates can take the wind out of the sails of the stock market. Rising borrowing costs mean companies have less cash to use on growth, consumers have less to spend, and investors can find better values outside of the stock market.

But you don’t have to be saddled with lackluster returns thanks to the Fed’s interest rate hikes.

In order to prepare Money Morning readers, we’ve compiled the three best investment strategies you can use as interest rates continue to increase.

These tools will allow you to find investments that can outperform the broader market as interest rates continue to rise.

And you might just make a killing in the process…

Interest Rate Play, No. 3: Invest in Can’t-Live-Without Companies

According to Money Morning Chief Investment Strategist Keith Fitz-Gerald, investors should own companies that are “anti-fragile.”

Simply put, investors should put their money behind products that people absolutely need.

Keith believes that the “must have” nature of these products and services ensure that these companies will keep making money no matter what the market is doing.

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These are companies that produce consumer staples, manage water treatment and delivery, and are contracted for national defense.

Some of the best firms responsible for producing these necessities are American Water Works Co. (NYSE: AWK), Becton Dickinson and Co. (NYSE: BDX), and Raytheon Co. (NYSE: RTN).

These companies have a proven track record of weathering market turmoil thanks to the indispensable nature of their products. And they’re sure to provide a shelter from the storm as interest rates continue to rise.

Investing in the “necessities of life” could net you a handsome gain in a rising interest rate environment. However, that’s not our only play…

Interest Rate Play, No. 2: Invest in Solid Assets

Technology stocks have taken a tremendous beating this month.

In just the last two trading sessions, FANG stocks have lost $200 billion in combined market caps as the sector’s leading companies show signs of slowing down.

According to Money Morning Special Situations Strategist Tim Melvin, much of this loss is because many of these firms are valued for their intellectual property rather than physical assets that ensure cash flow.

In other words, because these gains aren’t connected to physical output, they’re far more susceptible to volatility.

Tim argues that the best way to combat these kinds of losses is to invest in firms that deal in  “stuff” and “not ideas.”

This means that investors should tap into companies that deal in cash-generating assets like real estate.

According to Tim, you can’t go wrong with “toll roads, office buildings, power plants, cable systems, retail and medical real estate, and even the things needed to finance, build, and maintain stuff.”

These investments typically provide strong cash flows and growth potential and tap into the everyday financing required to keep the economy moving even in high-rate environments.

Investing in both necessities and hard assets will help you hedge against inflation in the markets.

However, there’s a better way to save your money from the worst fallout of rising interest rates.

And it couldn’t be easier…

Interest Rate Play, No. 1: Tap into Other Forms of Cash Flow

The final way to invest during times of rising interest rates is to consider investment funds that provide alternative income streams.

This strategy is riskier than traditional REITs or “must own” investments, but they do own cash-generating assets that provide significant income streams.

Money Morning Economist Garrett Baldwin says that income investors might want to take a look at a closed-end fund like the KKR Income Opportunities Fund (NYSE: KIO). This fund pays a healthy 9.37% yield and consists of roughly 50% leveraged loans through the private equity firm.

Leveraged loans have historically performed well in rising interest rate environments. According to a report from Goldman Sachs Group (NYSE: GS) in June, the institution favors cash-generating assets like leveraged loans due to the current macro environment.

The Fed’s rate hikes have been in response to economic expansion, tightening in the labor market, and gradually increasing inflation.

The KKR Income Opportunities Fund is a closed-end fund, which is one of Garrett’s favorite types of investments.

In this case, the assets in the fund trade roughly 7.78% below their net asset value. The fund currently offers a distribution rate of 9.37% and pays on a monthly basis.

Remember that closed-end funds are designed for longer-term holding periods that should include dividend reinvestment in order to maximize the yield and appreciation upside.

These kinds of returns will allow you to outpace the impact of rising interest rates.

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