What Is Portfolio Weight?
Portfolio weight is the percentage of an investment portfolio that a particular holding or type of holding comprises. The most basic way to determine the weight of an asset is by dividing the dollar value of a security by the total dollar value of the portfolio.
Of course, if the portfolio contains stocks or stock funds, the numbers change constantly as the price of the assets and the value of the entire portfolio change with the movement of the markets.
Nevertheless, active investors and professional money managers keep a sharp eye on the weights in their portfolios and adjust them periodically.
Understanding Portfolio Weight
A portfolio is created with weights in mind. At the broadest level, the portfolio may be weighted with 40% blue-chip stocks, 40% bonds, and 20% growth stocks. In that growth stocks category, the investor may want to dabble in emerging market funds, but with no more than 10% of the whole pie.
- A portfolio is created with weights in mind. For example, a portfolio might be made up of 40% blue-chip stocks, 40% bonds, and 20% aggressive growth stocks.
- Prices change constantly, so the balance must be reviewed frequently.
- An investor might sell a stock that has gained and reinvest the proceeds to bring the portfolio back to its correct balance.
A canny investor keeps an eye on the relative weights of assets, sectors, or asset types in a portfolio. Say, for example, a portfolio was designed to be made up of 50% stocks and 50% bonds. Then one or two of the stocks soar in price, resulting in a 70% to 30% mix. The investor may sell some of those high-performing stock shares, locking in some profit and returning the balance of the portfolio to 50-50.
Other Approaches to Calculating Weight
As noted, the simplest way to determine the weight of an individual asset is by dividing the dollar value of a security by the total dollar value of the portfolio.
Another approach is to divide the number of units of a given security by the total number of shares held in the portfolio.
The first approach will probably give you a more accurate picture of the weights of the various assets in your portfolio unless you chose assets with an eerie similarity in their prices per share.
Portfolio weights are not necessarily applied only to specific securities. Investors can calculate the weights of their portfolios in terms of sector, geographical region, index exposure, short and long positions, type of security, such as bonds or small-cap technology, or any other factor they may find relevant.
Essentially, portfolio weights must be determined based on the particular investment strategy used to build them.
Portfolio weights related to market values are fluid because market values change constantly. Equal-weighted portfolios must be rebalanced frequently to maintain a relative equal weighting of the securities in question.
Example of Portfolio Weight
The SPDR S&P 500 ETF is an investment vehicle that tracks the performance of the S&P 500. It does this by holding the weights of each stock in the index with respect to each stock's total market capitalization divided by the total market capitalization of the S&P 500.
A portfolio may be balanced by assets or asset types, industry sector or any other criteria. It's your choice.
For example, say Apple Inc. accounts for 3% of the S&P 500 and Microsoft Corporation makes up 2%. The ETF then will have 3% in Apple and 2% in Microsoft, with respect to market capitalization, to replicate the S&P 500.
These weights are always subject to change, and such an ETF rebalances accordingly.
As each individual stock has weight in the ETF according to its weight by market capitalization in the S&P 500, the corresponding weights of each sector are also represented in the ETF. If technology stocks hold the greatest weight in the S&P 500 at 20%, then the replicating ETF also holds 20% in technology.
Calculating Portfolio Weight
To get the market value of a stock position, multiply the share price by the number of shares outstanding. If Apple is trading at $100, and 5.48 billion shares are outstanding, then Apple's total market capitalization is $548 billion. If the total market capitalization of the S&P 500 is $18.3 trillion, then Apple's weight by market capitalization in the S&P 500 is 3%, or $548 billion / $18.3 trillion x 100 = 3%.
If you do this for your own portfolio, the total weight of a portfolio should equal 100%. Short positions and borrowings are considered negative values and carry negative weights.