Underweight

Underweight describes two related investing concepts:
– A portfolio that holds a smaller percentage of a particular security than its benchmark does.
– An analyst rating that expects a security to underperform its peers or the chosen benchmark.

Key takeaways

• “Underweight” can refer to a portfolio allocation or an analyst recommendation.
• Underweight portfolio status is a simple percentage comparison to a benchmark; an underweight stock rating is based on analyst judgment and chosen metrics.
• An underweight position isn’t inherently bad — it often reflects a manager’s lower conviction or desire to allocate capital elsewhere.

Underweight portfolios

A portfolio is underweight in a security when its weight in the portfolio is lower than the security’s weight in the benchmark. Weight is calculated as:
weight (%) = (market value of the holding / total portfolio market value) × 100

Example: If a benchmark holds 20% of its value in Security X and a fund holds only 10%, the fund is underweight in Security X by 10 percentage points.

Portfolio managers intentionally underweight securities they expect to underperform. The freed-up allocation can be moved to securities with a more favorable outlook to raise expected portfolio returns or to manage risk.

Underweight stocks (analyst view)

When an analyst rates a stock as underweight, they expect it to deliver returns below the average of the chosen comparison group (industry, sector, or index). Unlike portfolio weights, this judgment is subjective:
* It depends on which metrics and time horizon the analyst uses.
* Different analysts or benchmarks can yield different recommendations for the same stock.
* An underweight rating is typically interpreted as a sell or “do not buy” opinion.

Example

A benchmark index (Index DEF) allocates 10% of its weight to Company A. Fund ABC, after its research, believes Company A’s outlook is weak and holds only 1.5% of its portfolio in Company A. Compared with Index DEF, Fund ABC is underweight in Company A.

FAQs

• Does underweight mean sell?
• Generally, yes. An analyst’s underweight rating typically signals a sell or avoid recommendation.
• What does an underweight portfolio mean?
• It means the portfolio holds a smaller percentage of a specific security than the benchmark does.
• What is an overvalued stock?
• An overvalued stock is priced higher than fundamentals (for example, relative to earnings or P/E norms) justify; analysts expecting overvaluation often predict price declines.

Bottom line

“Underweight” is a straightforward allocation comparison when referring to portfolios and a more subjective expectation of underperformance when used as an analyst rating. In both cases, it signals lower conviction in the security relative to whatever benchmark or peer group is being used.