What Is Overweight?

Overweight refers to an excess amount of an asset in a fund or investment portfolio. In a fund, it refers to a situation in which an investment portfolio holds a greater percentage of a particular security, compared to the security's percentage of, or weight in, the underlying benchmark index. Benchmark indexes help investors guide their portfolio's performance against a comparable group of market assets.

Overweight can also refer—in a looser sense—to an analyst's opinion that a stock will outperform others in its sector or the market. In this sense, it is a buy recommendation, essentially. Conversely, when an analyst suggests underweighting an asset, they refer to it being less attractive to other investments.

Key Takeaways

  • Overweight means an excess amount of an asset in a fund or investment portfolio.
  • Overweight can also refer to an analyst's opinion that a stock will outperform others in its sector or the market giving it a buy recommendation.
  • Portfolio managers often overweight portfolio holdings if they think those holdings will perform well and boost overall returns.

Understanding Overweighting

In the sense of fund allocations in a portfolio manager will often adjust the weight of one asset or class of assets over another. For instance, financial experts often recommend that investors place 60% of their portfolio in stocks and remainder in bonds and other securities. If an investor chooses to place 75% of a portfolio in equities, his portfolio could be classified as "overweight stocks."

Though most commonly used in reference to stocks and bonds, portfolios can be overweight in other manners. These may include being overweight by a sector, in emerging markets or specific country holdings, or in the number or concentration of exchange-traded funds (ETFs) and other assets.

When an analyst refers to particular securities being overweight, they imply that those shares are selling at a price that is under what the asset is worth. An analyst may point at overweighting an individual stock or entire sectors or industries.

Overweighting Benchmarks

There are exchange-traded funds (ETFs) that track or mirror indexes. One example would be those that follow the S&P 500, by giving the stocks in the ETF basket a proportional weight to the actual weights those assets have in the S&P 500. The weight describes adjustments made to holdings to reflect the size, value, or number of any particular item contributing to the total.

Other types of ETFs may maintain equal weighting of each stock in the index in an attempt to overweight small-cap stocks and underweight large-cap stock. Also, these funds try to sell overvalued stocks—those with market prices unrepresented by their earnings—and buy undervalued stocks upon rebalancing to even out weights for each stock.

As an example, if stock A has a 1% weighting in the S&P 500, then in an equal-weighted fund it would have a 0.2% weighting to represent an equal weight for all stocks in the S&P 500. Stock A would effectively be underweighted, compared to the index. If, however, stock B has a 0.1% weight in the S&P 500, then it would effectively become overweight in the equal-weighted portfolio with a weight of 0.2% to make its weight equal with the other 499 stocks in the portfolio.

Overweighting Pros and Cons

In some situations, portfolio managers may purposefully overweight a particular holding. Actively managed funds or portfolios will take an overweight position in particular securities if doing so allows them to achieve excess returns. The portfolio manager will do this if they believe that an asset will outperform other investments in the portfolio. For example, they may raise a security's weight from its normal 15% of the portfolio to 25%, in an attempt to increase the returns of the portfolio.

Another reason for overweighting a portfolio holding is to hedge or reduce the risk from another overweight position. Hedging involves taking an offsetting or opposite position to the related security. The most common method of hedging is through the derivative market.

As an example, if you hold shares of a company currently selling at $20, you may purchase a one-year expiration put option for that stock at $10. A year later, if the stock is selling at more than $10 you let the put expire, losing only the price of that purchase. Should the stock be selling for under $10, you may exercise the put and receive $10 for your shares.

Of course, by putting all their eggs in one asset basket, the investor may find that they have reduced the overall diversification of their portfolio. A reduction in diversification can expose the holding to additional market risk.

Pros

  • Increases portfolio gains, returns

  • Hedges against other overweight positions

Cons

  • Reduces portfolio diversification

  • Exposes portfolio to more risk overall

Real-World Example of Overweight

Overweight has a slightly different definition in investment ratings or recommendations. If research or investment analysts designates a stock "overweight," it reflects an opinion that the security will outperform its industry, its sector or the entire market. An analyst's rating of overweight would be supported, for example, by a retail stock's return being expected to be above the average return of the overall retail industry over the next eight to 12 months.

The alternative weighting recommendations are equal weight or underweight. Equal weight implies that the security is expected to perform in line with the index, while underweight implies that the security is expected to lag the index in question.

So, an overweight rating is something of a "buy" recommendation. CNBC reported March 22, 2019, that several major investment firms' analyst calls. They included J.P. Morgan downgrading Sherwin-Williams from overweight to neutral and upgrading Lumentum to overweight from neutral.