What is overweight?
Overweighting refers to excess assets in a fund or investment portfolio. In a fund, it refers to a situation in which an investment portfolio holds a higher percentage of a particular security, relative to the percentage or weight of the security of the underlying benchmark. Benchmarks help investors orient their portfolio performance against a comparable group of market assets.
An overweight may also refer, in a broader sense, to an analyst’s opinion that one stock will outperform others in its sector or the market. In this sense, it is essentially a purchase recommendation. Conversely, when an analyst suggests underweighting an asset, he refers to it being less attractive for other investments.
Key points to remember
- Overweight means an excess of an asset in a fund or an investment portfolio.
- An overweight position can also refer to the opinion of an analyst that one share will outperform others in its sector or market, which will give it a buy recommendation.
- Portfolio managers often overweight portfolios if they believe these stocks will perform well and increase overall returns.
Understanding the overweight
In the sense of fund allocations in a portfolio manager, the weight of one asset or one asset class compared to another is often adjusted. For example, financial experts often recommend that investors invest 60% of their portfolio in stocks and the rest in bonds and other securities. If an investor chooses to place 75% of a portfolio in equities, his portfolio could be classified as “overweight equities”.
Although most often used in reference to stocks and bonds, portfolios can be overweighted in other ways. These may include being overweight a sector, emerging markets or holdings of specific countries, or the number or concentration of exchange traded funds (ETFs) and other assets.
When an analyst refers to an overweight in certain securities, this implies that these shares are sold at a price lower than the value of the assets. An analyst can report an overweight in individual stocks or entire sectors or industries.
There are exchange traded funds (ETFs) that track or mirror the indices. An example would be those following the S&P 500, giving the shares in the ETF basket a weight proportional to the actual weights that these assets have in the S&P 500. The weight describes the adjustments made to the holdings to reflect the size, the value or the number of any particular element contributing to the total.
Other types of ETFs may maintain an equal weighting of each share in the index in order to overweight small cap stocks and underweight large cap stocks. In addition, these funds attempt to sell overvalued stocks – those whose market prices are not represented by their profits – and buy undervalued stocks during rebalancing to balance the weightings of each stock.
For example, if the A share has a weight of 1% in the S&P 500, then in an equal weight fund, it would have a weight of 0.2% to represent an equal weight for all the stocks in the S&P 500. L ‘A share is effectively underweighted relative to the index. If, however, share B has a weighting of 0.1% in the S&P 500, it would effectively become overweighted in the equally weighted portfolio with a weighting of 0.2% so that its weighting is equal to the other 499 shares of the wallet.
Overweight pros and cons
In certain situations, the portfolio managers can deliberately overweight a particular position. Actively managed funds or portfolios will be overweight in certain securities if this allows them to achieve excess returns. The portfolio manager will do so if it believes an asset will outperform other investments in the portfolio. For example, they can increase the weight of a security from its normal 15% of the portfolio to 25%, in order to increase portfolio returns.
Another reason to overweight a portfolio is to hedge or reduce the risk of another overweight. Hedging consists of taking a compensatory position or opposing the corresponding security. The most common method of hedging is through the derivatives market.
For example, if you hold shares of a company that are currently selling for $ 20, you can buy a put option at the expiration of one year for that stock at $ 10. A year later, if the stock sells for more than $ 10, you let the put expire, losing only the price of that purchase. If the stock sells for less than $ 10, you can exercise the put option and receive $ 10 for your shares.
Of course, by putting all their eggs in one basket of assets, the investor can see that he has reduced the overall diversification of his portfolio. A reduction in diversification can expose participation to additional market risk.
Increases portfolio gains and returns
Hedging against other overweight positions
Reduces portfolio diversification
Exposes the portfolio to higher overall risk
Real example of overweight
The overweight has a slightly different definition from investment ratings or recommendations. If research or investment analysts designate an “overweight” share, this reflects an opinion that the stock will outperform its industry, sector or the broader market. An analyst’s overweight would be supported, for example, by the fact that the performance of a retail security should outperform the average performance of the entire retail industry over the next eight to 12 months .
The other weighting recommendations are equal or insufficient. An equal weighting implies that the security should function in accordance with the index, while an underweighting implies that the security should be behind the index in question.
Thus, an overweight is a sort of “buy” recommendation. CNBC reported on March 22, 2019 that several analysts from major investment firms were calling. They included J.P. Morgan downgrading Sherwin-Williams from overweight to neutral and improving Lumentum to overweight from neutral.