Young & Invested: Why we just downgraded one of the biggest ETFs on the ASX

Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.

This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.

Edition 69

The recent launch of SpaceX has reinvigorated a familiar consideration for ETF investors – what are we actually investing in? The wave of index reshuffles to jump on the IPO hype is a good reminder that passive doesn’t imply being neutral.

One popular ETF that will soon be holding SpaceX is the Betashares Nasdaq 100 ETF NDQ which was recently downgraded from a Neutral to a Negative Medalist Rating under our updated research methodology. While the portfolio itself hasn’t changed drastically, the way we evaluate fees has shifted how NDQ compares with broader, cheaper US equity options.

BetaShares NASDAQ 100 ETF NDQ

Investment Management Fee: 0.48%
Morningstar Category: Australia Fund Equity North America
Morningstar Category Index: MSCI USA Index (Net Return in AUD)

A quick breakdown

Betashares Nasdaq 100 ETF NDQ adopts a full replication approach to the Nasdaq 100 index, which tracks the performance of the 100 largest non-financial firms on the Nasdaq exchange. The index weights companies by market cap while excluding stocks listed on other exchanges.

Importantly, if a company were to depart from a Nasdaq listing, the fund would be required to sell its holdings. Our research analyst, Ibrahim Guled-Warfield believes this shrinks the opportunity set and leads to a suboptimal portfolio with limited diversification.

Guled-Warfield finds the fund is overshadowed by an index methodology lacking an investment rationale beyond promoting the Nasdaq’s exchange.

How we rate funds

The ETF universe is expanding quickly and investors now face the prospect of forming a portfolio by choosing from hundreds of products. It’s not exactly a simple decision‑making environment, which is why having a consistent framework to assess and compare funds becomes crucial.

The Morningstar Medalist Rating is a forward‑looking assessment of how likely a fund is to outperform its category benchmark over a full market cycle. Funds can receive Gold, Silver, Bronze, Neutral, or Negative ratings.

Gold, Silver and Bronze mean that we expect the fund to outperform its category benchmark. Neutral means the odds are roughly balanced and Negative means we believe the fund has meaningful obstacles to delivering competitive long‑term returns.

Historically, the Medalist Rating has been built on the three core pillars of people, process and parent. Those pillars reflect fundamental drivers of long‑term performance. Our analysts assess each pillar and combine those assessments with the fund’s price and its likelihood of outperforming its category benchmark.

As of April this year, our methodology has been simplified with one of the key enhancements being the introduction of a price score. This is a continuous score from -2.5 (most expensive) to +2.5 (cheapest), showing whether a fund’s fee structure is working in your favour or eroding long-term returns by feeding into our overall rating as below.

What are you actually holding?

Many investors assume an index is simply a transparent reflection of ‘the market’. However, every rule e.g. what gets included and excluded, how holdings are weighted and when changes occur, embeds a set of assumptions and characteristics in the final product. These choices shape a portfolio’s behaviour just as much as actively stock picking would. In NDQ’s case, those decisions have meaningful consequences.

The fund’s market‑cap‑weighted approach leverages the market’s consensus opinion on each firm’s relative value, but it also magnifies the influence of the largest companies.

Over the past five years, as much as 90% of the index has been concentrated in technology, communication services, and consumer cyclicals, with technology alone consistently accounting for more than half. These sectors tend to be more volatile and are particularly vulnerable in periods of market stress.

As mentioned previously, the exchange-based limitation to the Nasdaq introduces arbitrary exclusions and concentration risk. This results in a portfolio where sector exposures diverge meaningfully from the broader benchmark index.

The combination of a 100 company limit and market‑cap weighting produces a top‑heavy portfolio, with the ten largest stocks historically representing between 45% and 60% of total assets.

Though concentration in itself isn’t inherently negative, it does mean outcomes become heavily tied to the fortunes of a small group of mega‑caps. When that concentration stems from index design rather than deliberate investment rationale, it raises questions about whether the exposure is as diversified or representative as investors might expect.

We ascribe NDQ’s Process Pillar as Below Average. Ultimately, our analyst believes that broader options are more compelling for US equity exposure.

A decade of strong returns

NDQ is backed by an experienced team and has delivered strong performance since its inception in 2015. From May 2015 to June 2026, the fund outperformed both the MSCI USA Index and category average by around 5% on an annualised basis.

Historically, both the mega-cap tilt and skew toward tech stocks have worked in the fund’s favour over the long term. However, as most investors are aware, we should be careful in extrapolating such strong returns into the future.

Why the rating downgrade?

Our research analysts recently downgraded NDQ ETF from a Neutral to Negative Morningstar Medalist Rating. The reason behind this is fairly straight forward. Fees carry significant weight in our fund ratings because they remain one of the most reliable predictors of future performance.

It’s tempting to look at ETFs like NDQ that have historically outperformed despite a higher fee and assume the fee discussion is irrelevant. However, the evidence largely doesn’t support that view. Data has consistently shown even higher-fee funds that have been performing well rarely maintain that momentum over the long term.

As the time horizon increases beyond five years, past performance becomes less important in determining a fund’s category-relative future performance. Beyond that, lower fees, a sound investment process and solid managers are key.

NDQ’s prospective total cost ratio is 0.48% per year, placing it in the most expensive quintile of its category peers where the median fee is 0.31%. This results in a Price Score of -1.56 which indicates that the fund’s fee structure meaningfully detracts from its long‑term return potential relative to cheaper alternatives.

For passive funds like NDQ, the Morningstar Price Score carries more weight (40%) towards the overall rating, as cost is a major driver of outcomes in index‑tracking strategies.

Concluding thoughts

The most important takeaway here is that our fund ratings aren’t intended to be an all-encompassing view on whether a fund is ‘good’ or ‘bad’. Nor is it a prediction of poor returns or a suggestion that investors should rush for the exit.

The rating simply reflects our view that relative to the other options in the category, NDQ faces structural hurdles that make it less likely to outperform over a full market cycle. But these characteristics don’t deem the fund un-investable.

NDQ currently remains a strong performer and will continue to appeal to investors who want concentrated exposure to large US tech names. But for those seeking broad, cost-effective US equity exposure, our research concludes that there are more compelling choices available.

Ultimately, the key is ensuring your ETF’s characteristics align with your goals, risk tolerance, and time horizon.