Underweight

An Underweight position in a Stock Portfolio occurs when the holding in either an individual Stock or the combined Stocks in a Sector is less than the weighting in the Benchmark Index.

As discussed in the definition for Overweight, investors may choose to monitor their performance against a Benchmark Index, very common for Mutual Funds. An Underweight position in a Stock is where an investor considers the Stock’s valuation dynamics to be unfavourable. The position held in their Stock Portfolio will be less than what the Stock is weighted in the Benchmark Index. OK, so why not Sell the Stock altogether? This is of course an acceptable option, but it widens the tracking error against the Benchmark Index. Also, even when a Stock’s valuation is unfavourable, the dynamics driving the Stock Market do change and they can change quickly. Even a small investment in a Stock keeps it on “the radar”, this is up to your discretion as an investor.