Our analysts don’t think highly of this popular ETF

The Betashares Nasdaq 100 ETF (ASX: NDQ) is one of the four most widely held securities in the approximately 100,000 portfolios in our State of the Australian Investor 2026 report. Yet Morningstar Investor subscribers will find two ratings that appear to conflict: five stars, our highest star rating, and Negative, our lowest Medalist Rating.

To explain the distinction, I compare NDQ with the iShares S&P Small-Cap ETF (ASX: IJR), which sits in the same Morningstar Category but has a contrasting combination: two stars and a Silver Medalist Rating.

The table below shows how the two ETFs compare

NDQ and IJR at a glance

Source: Morningstar. Returns to 30 September 2026. Medalist Ratings as at last analyst review: NDQ 6 May 2026, IJR 27 April 2026.

What does the star rating measure?

The star rating looks back. It ranks a fund’s returns after fees against those of other funds in its Morningstar Category over three, five and 10 years, where available, penalising volatility, particularly on the downside. The overall rating combines the applicable time-period ratings. The top 10% receive five stars and the bottom 10% receive one.

No analyst sets the star rating; it is calculated using a consistent formula. However, it reflects only past performance, and a fund’s stars depend on how it compares with others in its category.

What does the Medalist Rating measure?

The Medalist Rating looks ahead. Our analysts assess a fund’s investment team, its investment process and the company that runs it, then combine those assessments with its fees. Ratings run from Gold to Negative and reflect whether we expect the fund to outperform its category average after fees and adjusting for risk over a full market cycle. For index funds such as these two, the fee score accounts for 40% of the rating, and the Process pillar, which judges how the index is built, carries most of the rest.

Why does NDQ have five stars and a Negative rating?

NDQ’s five stars come from its past returns, and its Negative rating comes from how its index is built and what it costs. Over the past decade NDQ returned 21.5% a year, among the highest returns in its category. Put another $10,000 invested 10 years ago would have grown to about $70,400 by 30 September 2026, with distributions reinvested. The average fund in the category turned $10,000 into about $35,800 over the same decade.

The chart shows how $10,000 invested in NDQ grew against the average fund in its Morningstar Category.

Source: Morningstar. Growth of $10,000 over the 10 years to 30 September 2026, against the Equity North America category average.

Those returns came from a narrow group of companies. NDQ tracks the 100 largest non-financial companies listed on the Nasdaq exchange. Companies listed elsewhere are left out, no matter how large they are, including Eli Lilly (NYSE: LLY) and ExxonMobil (NYSE: XOM), which both trade on the New York Stock Exchange. NDQ’s 10 largest holdings made up 47% of the fund at 27 October 2026, five of which were technology companies.

Our analysts rate the fund’s Process pillar Below Average because, in their view, choosing companies by the exchange they list on lacks an investment rationale. The concentration that lifted returns over the past decade also leaves the fund reliant on a small number of companies, many of them in the same sector. Its fee of 0.48% a year sits in the most expensive fifth of the category, where the median is 0.31%. The fee matters. Invesco QQQ Trust (NASDAQ: QQQ), a popular US-listed ETF that tracks the same index, is rated as Neutral. Helped by its fee of 0.18% a year.

Why does IJR have two stars and a Silver rating?

IJR’s two stars come from the funds its returns are measured against, and its Silver rating comes from its index design and low fee. The fund holds more than 600 small US companies, and its 10 largest made up about 5% of the fund at 26 October 2026. Because it shares a category with NDQ and other funds that hold the largest US companies, its star rating is reflective of the relative performance against the category.

Over the past decade both ETFs were among the funds in their category with the largest falls in poor months, so both scored High on the risk side of the star rating. The difference in stars comes from returns: IJR returned 10.6% a year, enough to grow $10,000 to about $27,400 by 30 September 2026, and its return score was Low.

The chart shows the same comparison for IJR.

Source: Morningstar. Growth of $10,000 over the 10 years to 30 September 2026, against the Equity North America category average.

IJR scores well on the two things that count most for an index fund. Our analysts rate the index construction as Above Average, along with its team, and its fee sits in the cheapest fifth of the category. The index admits only profitable companies, which our analysts believe reduces the risk of owning the smallest firms. On that basis they expect it to beat its category average over a full market cycle. The trade-offs are that small companies have historically been more volatile than large ones, and that the index removes companies once they outgrow it, so the fund can miss part of the gains from its most successful holdings.

What should you take away from the two ratings?

While the star rating records how a fund has performed against the other funds in the category, the Medalist Rating is our analysts’ view of whether it will outperform in the future. NDQ and IJR show that strong past returns and confidence in future performance do not always align.

When looking at a fund’s rating, check which category it is compared with and when its Medalist Rating was last reviewed. How much weight you give each rating depends on your goals and the fund’s role in your portfolio.

Star ratings reflect past performance, which is not a reliable indicator of future performance. The $10,000 figures are illustrative, based on annualised returns after fees with distributions reinvested and before tax.