What is Overweight
Overweight is a situation where an investment portfolio holds an excess amount of a particular security when compared to the security's weight in the underlying benchmark portfolio. Actively managed portfolios will make a security overweight when doing so allows the portfolio to achieve excess returns. Overweight can also refer to an investment analyst's opinion that the security will outperform its industry, its sector or the entire market.
BREAKING DOWN Overweight
Securities will usually be overweight when a portfolio manager believes that the security will outperform other securities in the portfolio. An example of having a security being overweight in an investment portfolio would be when a portfolio normally holds a security at a weight of 15% but the security's weight is raised to 25% in an attempt to increase the return of the portfolio. Another reason for overweighting a security in a portfolio is to hedge or reduce the risk from another overweight position.
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. 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. Specific analyst definitions may vary, however, regarding the period used and the benchmark the security is compared against.
Overweight vs. Underweight
There are exchange-traded funds (ETFs) that track indexes such as the S&P 500, giving the stocks in the ETF proportional weights to the actual weights they have in the S&P 500 or other index. Other ETFs may maintain equal weights of each stock in the index in an attempt to overweight small-cap stocks and underweight large cap stocks; further, these funds try to sell overvalued stocks and buy undervalued stocks upon rebalancing to even out weights for each stock.
If stock A, for example, has a 1% weighting in the S&P 500, then it would have a 0.2% weighting in an equal-weighted fund to represent an equal weight for all stocks in the S&P 500. Stock A would effectively be underweight. 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.
Overweight can also have a looser meaning related to composition of a portfolio. For instance, financial experts often recommend that investors place 60% of their portfolio in stocks and the rest in bonds and other securities. If an investor chooses to place, for instance, 75% of a portfolio in stocks, it is overweight stocks. Not just in stocks or bonds, portfolios can be overweight sectors, emerging markets, certain countries, ETFs and others.