What does 'Underweight' mean

Underweight refers to one of two situations in regard to trading and finance. An underweight portfolio does not hold a sufficient amount of a particular security when compared to the weight of that security held in the underlying benchmark portfolio. Underweight can also refer to an analyst's opinion regarding the future performance of a security in scenarios where it is expected to underperform.

BREAKING DOWN 'Underweight'

While an underweight portfolio can be identified through simple mathematics by determining what percentage of a portfolio is directed towards a particular asset, an underweight stock is identified on more flexible terms based on the variables chosen by the analyst who is making the determination.

Underweight Portfolios

An underweight portfolio occurs when the percentage, or weight, of a particular security within the managed portfolio is lower than that is held in the benchmark portfolio. For example, if the benchmark portfolio held a particular security with a weight of 20% and the investor portfolio only held 10% weight in that security, it would be deemed to be underweight in the security in question.

A portfolio manager can make securities underweight if they believe those specific securities will underperform when compared to the other securities in the portfolio. For example, consider a security in the benchmark portfolio with a weight of 10%. If the manager believes that the security will underperform over a certain time period, he can allocate the security a weight of less than 10% – say, to 8% – for that period. The 2% that is no longer directed towards that security can be allocated to other securities that have more positive outlooks in hopes of increasing the expected return for the overall portfolio.

Underweight Expectations

Analysts may refer to a security as underweight when the expected return is below the average return of the industry, the sector or the market that has been chosen as a point of comparison. In this context, being underweight is similar to an expectation of poor performance and may be based on a few selected variables chosen by the analyst making the determination.

There is no set time frame or specific benchmark for an analyst to make this determination, which leads to variances based on analyst opinion and the exact variables chosen as a point of comparison. This can cause a stock to be considered underweight compared to one index, but not when compared to another, leading to two different recommendations.

Example of Being Underweight

Investors can use the concept of being underweight on a grand scale to make inferences about the market and individual stocks. For instance, according to a research note by UBS in May 2017, hedge funds held the least amount of Apple compared to its weighting in indexes at the time, making them historically underweight. The analysts interpreted the underweighting to mean that the stock would continue to advance as fund managers began buying it to catch up on its rallying performance. 

RELATED TERMS
  1. Trading Effect

    Trading effect is the measure of performance that examines the ...
  2. Weighted

    Weighted is a description of adjustments to a figure to account ...
  3. Portfolio

    A portfolio is a grouping of financial assets such as stocks, ...
  4. Dispersion

    A statistical term describing the size of the range of values ...
  5. Benchmark

    A benchmark is a standard against which the performance of a ...
  6. Portfolio Variance

    Portfolio variance is the measurement of how the actual returns ...
Related Articles
  1. Investing

    Big Investors Go Underweight In FAAMG Stocks: Goldman

    Lightening Up: Investors cut stakes in Facebook, Apple, Amazon, Microsoft and Google
  2. Investing

    Benchmark To Show Winning Returns

    You can't win if you don't keep score. Read on to learn how to measure your returns.
  3. Financial Advisor

    Preparing for a Career as a Portfolio Manager

    Find out what it takes to win a spot in one of the most coveted financial careers, portfolio manager.
  4. Investing

    How to Use a Benchmark to Evaluate a Portfolio

    What is an investment benchmark and how is it used to evaluate the risk and return in a portfolio.
  5. Investing

    Spread Out Risk With Sector-Based ETFs

    These ETFs take the sector rotation strategy from institutional investors and puts it in your hands.
  6. Investing

    Why Investors Are Doubling Down on Tech Stocks

    Fund managers may be taking big risks by doubling down on winning stocks and sectors
  7. Investing

    A Seasoned Vet Among ESG ETFs

    This old fund allows investors to assess the merits of environmental, social and governance investing.
  8. Personal Finance

    What Exactly Does A Portfolio Analyst Do?

    Portfolio analysts have the exciting role of working between the investment team layers and they touch various aspects of an investment organization.
  9. Investing

    Fitbit Upgrade Actually Tanks Its Stock (FIT)

    Fitbit got its shares upgraded by Pacific Crest to neutral sector weight from underweight with the firm arguing shares have hit a floor.
RELATED FAQS
  1. What should I use as a benchmark for my small-cap stock portfolio?

    The Russell 2000 and S&P SmallCap 600 are two of the best indexes to use as a benchmark for small-cap performance. Read Answer >>
  2. What's the difference between primary and secondary capital markets?

    In the primary market, investors buy securities directly from the company issuing them, while in the secondary market, investors ... Read Answer >>
  3. What is the difference between a sharpe ratio and an information ratio?

    Understand the meaning of the Sharpe ratio and the information ratio, and understand how they differ as tools for evaluating ... Read Answer >>
Hot Definitions
  1. Investment Advisor

    An investment advisor is any person or group that makes investment recommendations or conducts securities analysis in return ...
  2. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  3. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  4. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  5. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  6. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
Trading Center