Ride the bailout wave

Avoid: Banks
Buy: Fannie and Freddie Debt

By far the biggest beneficiaries of the bailout have been banks, and even more money is headed their way. In March, Treasury Secretary Timothy Geithner announced plans for the government to partner with private investors to buy up to $1 trillion in toxic assets weighing down bank balance sheets. Of course, no one knows if the plan will work. And if it doesn't, who knows if Uncle Sam will have to take over yet another large financial institution?

So rather than trying to roll the dice on the still-hazy fate of the nation's banks, profit from what's certain. Mortgage giants Fannie Mae and Freddie Mac have already effectively been nationalized. With the government at the controls, Fannie's and Freddie's bonds are now nearly as safe as Treasuries, with a much fatter yield.

Not interested in bonds? Well, if the government succeeds in reviving the economy, stocks are likely to rebound before the economy does. And "asset-management stocks should be early beneficiaries of improvements in the markets," says Robert Lee, an analyst with Keefe Bruyette & Woods. That's because asset managers, whose shares have been pummeled lately, make money by collecting fees based on the market value of their investments.

How to invest: An easy way to get exposure to Fannie Mae and Freddie Mac bonds is through Vanguard Short-Term Federal, which returned 6.3% annually for the past three years, beating 89% of its peers. For asset-management stocks, stick with firms with a global reach and a diverse client base, such as AllianceBernstein.
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