Why we’re neutral on popular ETF NDQ

ETFs wrapped up FY25 in dominating fashion, claiming 12 of the top 20 trades among Sharesight users. Popular global picks like Vanguard’s VGS and iShares’ IVV led the charge while tech-focused Betashares NDQ remained a crowd favourite.

Figure 1: Top trades of FY2025. Source: Sharesight.

Despite wide-spread popularity and strong historical performance, Morningstar has long held a Neutral Medalist Rating for NDQ. Today I’ll be exploring the disconnect between investor enthusiasm and our analyst assessment.

What a neutral rating means

For passive strategies, a Neutral Morningstar Medalist Rating implies we do not expect the fund to beat the Morningstar Category index average return after fees. In the case of NDQ the category is Equity North America which is represented by the MSCI USA Index.

Methodology

As the name implies, Betashares Nasdaq 100 ETF NDQ adopts a full-replication approach to track the performance of the 100 largest non-financial firms on the Nasdaq exchange. If a company were to depart from a Nasdaq listing, the fund would be required to sell its holdings. It is likely that the construction rules are designed to promote the exchange. Morningstar analyst Ibrahim Guled-Warfield believes this results in a suboptimal portfolio.

Composition

As seen below in Figure 2, the fund’s methodology causes section concentration in the technology (53%), communications (16%) and consumer cyclical (13%) sectors compared to the MSCI USA index (35%, 10%, 11%). This creates increased concentration risk as seen over the last five years where up to 90% of the index has been represented by these three sectors.

Figure 2: NDQ ETF composition. Data as of 30 June 2025.

Given selection criteria exclude firms listed on any other exchanges, the opportunity set is superficially constrained, missing out on prominent names like Walmart (USD 820bn) and Oracle (USD 660bn).

Sector biases can translate to volatile relative performance. The technology companies that dominate the portfolio often receive high valuations because of their potential, but as a result, the higher price/earnings ratios mirror that of a growth fund.

The top 10 largest stocks have historically accounted for between 45% and 60% of the portfolio given the 100-company ceiling and market-cap weighting.

The tech concentration has delivered strong performance benefiting from a favourable upcycle for the growth factor. But given the high concentration risk, we have higher conviction with more robust strategies within the category (Australia Equity North America).

Performance

One of the primary reasons NDQ continues to attract flocks of investors is its impressive performance since inception. From 2015 to 2025, it has outperformed both the category average and index by over 7% on an annualised basis.

Figure 3: NDQ ETF trailing returns. Source: Morningstar. Month end as of 31 July 2025.

Figure 4: Growth of $10,000 investment in NDQ since inception. Data as of 13 August 2025. Source: Morningstar.

Both the fund’s mega-cap tilt and skew toward technology stocks have worked in its favour but investors should be wary of extrapolating this into the long-term.

It’s important to assess the market conditions that both help and hinder the fund’s performance. Due to the fund’s composition, higher-than-average levels of volatility are susceptible in risk-off environments (investor caution driven by major events).

We see evidence of this in 2022 when NDQ shed 28% - double the losses suffered by the category benchmark. This saw it ranked in its peer group’s bottom quartile. Defects in the strategy reared their head, as technology stocks faltered (as they typically do in risk-off environments), whilst the cheaper sectors that NDQ excludes showed resilience and navigated the volatility more successfully.

Conversely, as the market cooled off, the fund saw a resurgence with an annual return of 53% in 2023, driven by its technology and communications exposure. This formed a ‘perfect storm’ of sorts, but it cannot always rely on these conditions.

What we think

Structural flaws undermine confidence in this fund’s strategy. It’s 10-year elevated beta* (1.14), standard deviation** (15.8 vs 12.3 for category index) and downside capture ratio*** (112) over the trailing five years highlight the potential to erode capital over time. The significant tilt towards more sensitive sectors also amplifies losses.

Why this matters: Given the level of volatility associated, certain investors should proceed with caution, especially if they are approaching their intended withdrawal date. For those with a longer time horizon, adequate returns generation is more important than short-term price fluctuation.

Additionally, the implications of a Nasdaq-only mandate overwhelm the strategy’s attractiveness. This mandate results in the creation of arbitrary exclusions and concentration risk – making broader options more compelling for US equity exposure.

We think the 0.48% annual fee is reasonable. Based on our evaluation of NDQ’s People, Process and Parent, we do not believe this share class will be able to deliver positive alpha relative to the category benchmark index. Thus, it is ascribed a Morningstar Medalist Rating of Neutral.

Valuation

Applying our equity research share level valuations to the underlying holdings shows that NDQ screens 1.08 price/fair value (July 2025), indicating the ETF trades slightly above fair value.

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*Beta is a relative risk measure that looks at the volatility of a single stock versus the overall volatility of the market it trades in. The market is ascribed a beta of 1 and investments are ranked by how much they deviate from the market. For example, BHP Group has a 5-year beta of 0.68, meaning the price is generally less volatile than the market, and its movements are typically 68% of the market’s movements. If a stock has a negative beta, that means it generally moves in the opposite direction to the market. 

**Standard deviation is often used as a proxy for investment risk. This calculates how widely a stock or portfolio return varied from the average over a historical period. Using the standard deviation of historical performance can help investors estimate the range of returns for a given investment. A high standard deviation implies that the predicted range of performance is wide and therefore the investment has greater volatility. Most people define risk tolerance as how much volatility they can stomach.

***Downside capture ratio measures the manager’s performance in down-markets relative to the index. A value of less than 100 indicates that an investment has lost less than its benchmark when the benchmark has been in the red. The calculation looks like: (Fund’s return during down markets / Benchmark’s return during down markets) × 100