Definition of underweight
The terms underweight is used by brokers and fund managers to indicate their preference for stocks or markets relative to particular indices or benchmarks.
Explanation of Underweight
In a portfolio, the investor holding less of a particular stock, than would be justified by that stock’s weighting in the benchmark against which the portfolio is evaluated. Some securities research analysts’ use the term in their opinions on stocks, recommending that investors reduce the weighting of a share in their portfolios. It is a bearish view, but not as strong as a sell recommendation.
For example consider a security in the benchmark portfolio with a weight of 12%. If the manager believes the security will underperform over a certain time period, he/she will allocate the security a weight of less than 12% for that period, in hopes of increasing the portfolios expected return.