Investors are nervously awaiting the day the Fed finally boosts interest rates. But a few companies are saying, “Bring it on!”
A group of companies, namely the discount brokers like Charles Schwab (SCHW), E-Trade (ETFC)and TD Ameritrade (AMTD), actually stand to win when interest rates move higher – because much of their business is tied to collecting interest on cash that’s highly sensitive to short-term rates, according to a USA TODAY analysis of data from S&P Capital IQ and RBC Capital Markets.
Get this: Several of the online brokers actually bring in more revenue collecting interest from uninvested cash sitting in investors’ accounts – than from charging their customers commissions to buy and sell stock. That means even a small increase in short-term interest rates translates into a potential windfall for the companies and the investors who own their shares. This excess cash can turn even more lucrative for the brokers if interest rates rise even a little.
“Investors anticipating rising interest rates ought to consider discount brokers,” according to a report by RBC’s Bulent Ozcan. “Having analyzed three publicly traded discount brokers, we do expect a significant increase in earnings as rates move higher.”
Take E-Trade, which is the most dramatic example. The company has pulled in $1.3 billion in interest and dividend income over the past 12 months, which is roughly three times more than what the company brought in from trading commissions and 73% of the company’s total revenue during the period.
A group of companies, namely the discount brokers like Charles Schwab (SCHW), E-Trade (ETFC)and TD Ameritrade (AMTD), actually stand to win when interest rates move higher – because much of their business is tied to collecting interest on cash that’s highly sensitive to short-term rates, according to a USA TODAY analysis of data from S&P Capital IQ and RBC Capital Markets.
Get this: Several of the online brokers actually bring in more revenue collecting interest from uninvested cash sitting in investors’ accounts – than from charging their customers commissions to buy and sell stock. That means even a small increase in short-term interest rates translates into a potential windfall for the companies and the investors who own their shares. This excess cash can turn even more lucrative for the brokers if interest rates rise even a little.
“Investors anticipating rising interest rates ought to consider discount brokers,” according to a report by RBC’s Bulent Ozcan. “Having analyzed three publicly traded discount brokers, we do expect a significant increase in earnings as rates move higher.”
Take E-Trade, which is the most dramatic example. The company has pulled in $1.3 billion in interest and dividend income over the past 12 months, which is roughly three times more than what the company brought in from trading commissions and 73% of the company’s total revenue during the period.
The biggest winner from a rise in rates, Ozcan says, would be Schwab as the company not only has a huge pile of uninvested cash it collects interest on but can save in other ways when interest rates rise. Schwab pulled in interest income of $2.4 billion over the past 12 months, which is also three times the size of the $887 million brought in from charging trading commissions.
Schwab will also benefit from higher rates because the firm could start charging management fees to customers who own Schwab money market funds, Ozcan says. Schwab currently waives management fees because if the brokerage actually charged a fee for these funds they would have a negative yield.
Read more: These 5 companies score big when rates rise
Schwab will also benefit from higher rates because the firm could start charging management fees to customers who own Schwab money market funds, Ozcan says. Schwab currently waives management fees because if the brokerage actually charged a fee for these funds they would have a negative yield.
Read more: These 5 companies score big when rates rise