One Way to Profit From Higher Interest Rates

With interest rates about as low as they can go, Motley Fool Pro analyst Todd Wenning says now's the time to look for stocks that will benefit when interest rates begin to rise again.

His favorite way to play rising rates is with brokerage stocks like TD AMERITRADE (Nasdaq: AMTD  ) and Schwab (Nasdaq: SCHW  ) ; his two favorites in the space are the institution-focused Interactive Brokers (Nasdaq: IBKR  ) and TradeStation (Nasdaq: TRAD  ) .

Brokers, who primarily generate revenue from trading commissions and interest income from cash balances and margin loans, have had their profit margins pinched by the current low rate environment. For example, in 2007, Interactive Brokers raked in $782 million in interest income, but only $132 million over the past 12 months -- an 83% drop in about two years.

The good news for brokers is that many have been adding new accounts throughout the recession, which means that once interest rates rise again, they could be bringing in even more interest income than before.

Adding a helping of stocks that benefit from higher interest rates can help offset potential losses from other portfolio holdings that tend to lose value in a higher rate environment, like bonds and utilities. Watch the video here:

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Fool analyst Todd Wenning does not own shares of any company mentioned. Interactive Brokers Group and Schwab are Motley Fool Stock Advisor selections. The Motley Fool has a disclosure policy.

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  • Report this Comment On June 15, 2010, at 11:48 PM, Flishiz wrote:

    I think I may be missing something here with the brokerage picks. Wouldn't a higher interest rate environment lead to fewer investments in stocks and more in investments that raise in return as interest rates rise, such as savings accounts or CDs? To me, that would drastically offset the gains made in margin trading offered by brokerages, because if there are fewer people buying and selling, you can sure assume there will be fewer going on margin, as well.

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