The S&P 500 companies are a core allocation for most investors, representing some of the best businesses in the world. Yet, at this moment the top 10 stocks in the S&P 500 represent a record 41.2% of the index. This concentration represents a challenge and risk for investors. As we look to 2026 and beyond, how does one stay invested in the S&P 500 companies, while reducing concentration risk and without introducing unnecessary deviations (tracking errors)?
Concentration is a Big Risk to a Core Allocation
- Historically, levels of high concentration lead to poor forward returns in the S&P 500. The worse the concentration, the worse the returns. Current levels of concentration suggest a forward return on the S&P 500 Index of -5%1.
- Concentration also leads to more volatility as the index return becomes disproportionately dependent on single stocks. Today’s concentration suggests volatility above 20%2.
- Core allocations are meant to be diversified across, yet today S&P 500 investors are taking unprecedented individual stock risk. For these companies valuation is especially problematic with the average P/E of the top 10 nearly 57% higher than the other 490 companies3.
Source: Goldman Sachs GIR. *Market concentration is defined as the market cap of the largest stock relative to the 75th percentile stock; grey observations are recessions. As of September, 2025.
Most Solutions to Concentration Add Other Problems
One alternative is to invest in each S&P 500 company with an equal weight. This naturally solves concentration but introduces a host of other problems. Equal weight has:
- Low overlap4 of just 47% with the S&P 500
- Substantially different sector and factor exposures
- Higher (taxable) turnover, given frequent rebalance capping ability to “run winners”
As a result, this solution leads to very high tracking error of 7.9% vs. the S&P 5005.
DSPY is an Innovation on S&P 500 with Key Benefits
Source: Bloomberg as of 09/30/2025. Volatility is standard deviation of return since inception of DSPY (May 2025). Dividend yield is based on consensus dividend forecasts for all S&P 500 constituents. Tracking error measured as of 09/30/2025 using Bloomberg MAC3 Model.
The Bottom Line
When managing risks, especially in core exposure, it’s key to not replace old risks with new risks. Reducing concentration risk of the S&P 500 today, while still maintaining high overlap with the S&P 500, requires a targeted approach. The Tema S&P 500 Historical Weight ETF Strategy (DSPY) offers investors a way to stay invested in the S&P 500 in 2026 but, by using historical average weights. This strategy reduces concentration risk, without introducing unnecessary tracking error.
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