Nado Tools 101:
-Using a Nair directly from above, falling exactly in the top-center of the tornado (there's no room for error here). The final hit of Dair in this exact location also works but is obviously much tougher to time. Other aerials generally don't work because they have too little priority or require Mario to extend himself within the Tornado's hitbox, which generally just doesn't work out. Fireballs that land in this exact location also halt the tornado, but is pretty tough to nail consistently.
-A Usmash facing towards the tornado will clobber it, it's personally my most reliable punish. Your face will travel through (and outprioritize) all the nado hitboxes and smack MK in the center. If you're running away, you can do a reverse Usmash (Run->Input other direction->Jump->Usmash before you leave the ground->Charge if necessary (optional)).
-FLUDD will push MK upwards, keeping you safe from the nado and offering an opportunity to punish. I would only recommend using at least 1/2 charged FLUDD or more, as too little water won't get him high enough (and too little range to work with).
-Some people suggest using grounded UpB (Out of shield or otherwise...) for its startup invincibility frames. I personally never do this, because (much) more often than not my invincibility doesn't last long enough to ping MK, and my UpB gets trapped and outprioritized by the swirling hitboxes, thus sending me upwards with RCO lag waiting for my landing. But if you can make this work then have fun with it.
-You can cape the nado from the upper corner if you space the cape very well. Often this may lead to a free stock.
-If you're stuck in shield, more often than not you're forced to wait it out (tilt shield up!). If you think he will stay on top of you, hold the shield and punish OOS when it ends. If you think he'll retreat towards the end of the move, roll in the direction you think he'll go to before the move ends. Use the Cstick to roll so you can tilt your shield up while rolling.
Wow, so many tools, and from all sorts of angles!
Things to watch out for:
-The main problem is that all these tools require time and space to set up. If the MK starts up Nado pretty close to you, it's near impossible to do any of these on reaction. You need to rely on hard reads and anticipation to land them in those circumstances.
-The most reliable tools are grounded. If you're in the air (and not so high that it would never hit you), you're boned. Mario is too floaty to have a chance to airdodge through it. He has no aerials to break through, and often your safest choice is to waste a double jump if you haven't already. This is why the matchup is so ridiculous: Mario cannot SH fireball (or SH anything) without the MK being able to nado on reaction. But MK's ground game (Dash attack, dash grab, walk up ftilt) make Mario look like a joke character. Additionally, when you use the DJ, he stops the nado, and has an advantageous position because you have to make it back down safely, while he has uair/ridiculous ground speed/more nados.
-You can't sidestep through the nado to preserve shield unless he moves away from you during the sidestep animation.
Sorry for the rambling, this is everything I know about MK's tornado. I still have problems dealing with his everything else (UpB OoS, dtilt, and dashgrabs mainly).