underweighted

Underweighted, or underweighting, is a term used in finance to describe a portfolio position whose weight is smaller than its weight in a reference benchmark or index. It expresses a relative stance rather than an absolute judgment about the security.

The term is commonly used by active managers to reflect a view that a particular security, sector, or asset class will underperform the market, or to reduce exposure for risk management or diversification. Underweighting is defined relative to the benchmark, so a position can be underweight even if it remains profitable if the benchmark performs better.

Examples include devoting a smaller portion of a portfolio to a sector than its market-weight in the benchmark. For instance, if technology comprises 25% of the benchmark but a fund holds 15%, technology is underweighted. Conversely, if the benchmark target is 30% and the fund has 35%, the position is overweight.

Implementation typically involves selling existing holdings, restricting new purchases, or using derivatives and hedges to reduce effective exposure. Rebalancing toward the target weights is common, though practical constraints and transaction costs can influence the decision.

Implications include potential reduced upside participation if the underweighted asset rallies, and the introduction of tracking error relative to the benchmark. Underweighting is the opposite of overweighting and is often contrasted with a neutral (benchmark-weighted) stance. It is one of several levers used in active portfolio management to express investment views and manage risk.