Tema Launches New ETF to Combat Concentration Risk

The U.S. stock market is highly dependent on just a few stocks. A new exchange-traded fund is trying to combat that concentration risk.

On Tuesday, the Tema S&P 500 Historical Weight ETF Strategy (DSPY), which seeks to reflect the S&P 500 but adjusts company weightings to match the S&P 500's average concentration level since 1989, hit the market, according to Tema’s press release. The expense ratio is 0.18%.

While investors have previously relied on the S&P 500 Equal Weight to mitigate concentration risk, the overlap between the S&P 500 and its equal-weight counterpart is at a multi-decade low, making the S&P 500 Equal Weight a less feasible solution to S&P 500 concentration, Maurits Pot, founder and CEO at Tema ETFs, told etf.com. DPSY allows investors to keep their S&P 500 exposure but with lower concentration and lower volatility, and it avoids the rigidity of a cap that an equal-weight has, he said.

“It’s a two-in-one solution,” Pot added. 

Addressing Concentration Risk 

In recent years, a handful of tech giants have dominated the U.S. stock market. As of the market close on March 31, the top-10 stocks in the S&P 500 index accounted for roughly 34% of the overall index, according to data from S&P Dow Jones Indices. 

Apple Inc. (AAPL) makes up 7%, while Microsoft Corp. (MSFT) makes up 5.9% and Nvidia Corp. (NVDA) comes in at 5.6%. Amazon.com Inc. (AMZN), Meta Platforms Inc. (META), Alphabet Inc. (GOOGL) and Tesla Inc. (TSLA)—the other “Magnificent Seven” stocks—are among the other behemoths that highly influence the index.

Last year, Morgan Stanley analysts reported that the rate of increase in U.S. stock market concentration in the last decade is the most rapid since 1950.

The top-10 holdings in DSPY will seek to represent just 22% of the total exposure, according to the press release.