Portfolio weight is the percentage composition of a particular holding in a portfolio. Portfolio weights can be calculated using different approaches; the most basic type of weight is determined 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.
Breaking Down Portfolio Weight
Portfolio weights are not necessarily applied only to specific securities. Investors can calculate the weight 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 companies; or any other type of benchmark. Essentially, portfolio weights are determined based on the particular investment strategy. Portfolio weights related to market values are fluid because market values change daily. 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. For example, say Apple Inc. accounts for 3% of the S&P 500 and Microsoft Corporation makes up 2%; the ETF then has 3% in Apple and 2% in Microsoft, with respect to market capitalization to replicate the S&P 500. These weights are 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.
Weights can be calculated for industries, sectors, geographies, and asset classes according to the investment strategy desired. The total weight of a portfolio should equal 100%. Short positions and borrowings are considered negative values and carry negative weights.
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%.