Is your portfolio positioned for rising interest rates?

After months of "Will they or won't they?" the wait is over. The Federal Reserve last week moved to increase interest rates for the first time in nearly a decade.

Conventional thinking is for investors to fear rate hikes; after all, when bond yields rise, prices fall. But investors who are willing to look closer might see that this time things are different, and just a few simple actions might help uncover opportunities.

Rising interest rates
Andresr | Getty Images

First, let's look at why this hike is so different from previous tightening cycles. It's important to note that the Fed only raised its benchmark interest rate by a quarter of a percentage point.

Why not a bigger hike? The Fed has made it clear that they are simply "normalizing" rates from their unusually low levels post-financial crisis, not taking measures to cool an overheating economy, as in the past. To ensure that the economy continues on its path to recovery, the Fed has made it clear that rates will rise gradually — likely remaining below historical averages for the foreseeable future.

So where might investors look for opportunity in this new environment? In the wake of the Fed's decision, here are some moves you may want to consider.

First, consider sectors that are well positioned to withstand — or even benefit from — rising rates.

Consider well-positioned equity sectors: Remember that when rates rise, it's not just bonds that are affected; stocks are, too. Higher rates mean that borrowing money becomes more expensive, so it's harder for some businesses to finance their operations.

As a result, sectors with companies that usually have large debt positions, such as utilities and telecommunications, typically experience stronger headwinds in a rising rate environment.

In contrast, many mature U.S. technology companies hold very little debt and high cash reserves, which may position them well to withstand rising rates. They can continue with shareholder-friendly activities, such as increasing dividends, share buybacks and mergers and acquisitions. Moreover, the U.S. technology sector is pro-cyclical, meaning that the sector typically grows as the U.S. economy expands.

Another pro-cyclical sector that we think is well positioned for rising rates is U.S. financials. Financial institutions, like banks, tend to be beneficiaries of rising rates because the rates that banks charge on loans (their revenue) may rise more than what banks pay on deposits (their costs).

Consider dividend growers, not just dividend payers: You may also want to take a look at your stock dividend strategies. Although traditional high-dividend payers (think the utilities and telecom sectors) have performed strongly in recent years, they've become quite expensive by most valuation metrics. And the previously low interest-rate environment paved the way for many of these businesses to load up on debt to expand their operations, while continuing to pay high dividends to investors. As a result, many of these companies may come under pressure when rates rise.

Sign Up for Our Newsletter Your Wealth

Weekly advice on managing your money
Get this delivered to your inbox, and more info about about our products and services.
By signing up for newsletters, you are agreeing to our Terms of Use and Privacy Policy.

Look for companies that have the potential to both increase dividends and sustainably grow profits over time, given their comfortable cash cushions and strong balance sheets.

But what about your bond portfolio? How can you prepare for a rising rate environment? Consider seeking a better balance of risk and return by reducing the duration of your bonds while adding credit exposure. Let's look at each of these actions.

Shorten your duration: In bond investing, we talk about "duration" as a measure of a bond's sensitivity to interest-rate changes. The longer the duration, the more a bond's price is impacted by interest-rate changes.

Typically, bonds with longer maturities have longer durations and vice versa. So investing in bonds with lower duration or shorter maturities can help to reduce your exposure to rising interest rates.

"Taking simple actions today may help you prepare your portfolio for this longer-term rising rate environment."

Add credit exposure: Bonds also offer the potential for income generation. Adding exposure to bonds issued by companies, also referred to as "credit," may help to provide additional yield over Treasurys.

This adds credit risk (the risk that the issuer won't pay you back), but investors are generally compensated for taking more credit risk with higher yields. All companies have a certain amount of credit risk, and generally, corporate bonds offer the potential for higher yield than Treasurys do.

Rates are rising, but we expect them to remain low for a long time. Taking simple actions today may help you prepare your portfolio for this longer-term rising rate environment.

— By Heidi Richardson, head of U.S. investment strategy for iShares and a global investment strategist at BlackRock