1 Sector ETF to Avoid Like the Plague in November

An investor looking at some recent goings on in financial markets, namely the massive paring of market value in the cryptocurrency realm and increased chatter about an artificial intelligence (AI) bubble, might conclude that now is a good time to get defensive.

There's some merit in that view, but consumer staples -- typically one of the most defensive sectors -- is betraying investors' trust. That alone is ample reason for market participants to approach staples exchange-traded funds (ETFs) with a healthy dose of skepticism and not attempt to catch what may be falling knives before November concludes.

In fact, the Consumer Staples Select Sector SPDR Fund (NYSEMKT: XLP) stands out as a sector ETF to avoid this month, and there are multiple reasons why that's the case.

This sector ETF should be avoided in November and perhaps beyond. Image source: Getty Images.

November rain for the XLP ETF

Home to $14.94 billion in assets under management, this consumer staples ETF is one of the oldest and largest funds in the category, but those traits haven't insulated it from recent weakness. For the month ending Nov. 18, the fund retreated 3.6%, bringing its year-to-date loss to 2.7%. It's off 6.4% over the past six months. All those data points justify why there hasn't been a real sector rotation out of growth fare into defensive groups like staples. Those are good reasons to avoid this ETF this month.

But wait, there's more -- and it's comparably gloomy.

Staples are slumping during a calendar stretch that's often kind to the sector. Over the past 20 years, November has, on average, been the second-best month of the year in which to own consumer-packaged goods stocks, with the sector posting a 70% win frequency in the 11th month of the year.

With November drawing to a close, this staples ETF needs a miracle to get anywhere close to living up to its previously positive seasonal trends. Said another way, this sector fund has disappointed investors at a time when it should be doing the exact opposite.

A dud sector ETF that's not cheap

It's not uncommon for consumer staples stocks to trade at multiples above those of the broader market. That's the cost of admission investors pay to access above-average dividend yields and favorable volatility traits, but these days, some big-name staples are looking quite frothy on valuation.

For all the talk about tech stocks like Nvidia being too expensive, the real valuation offenders are Costco Wholesale and Walmart. Believe it or not, Costco commands a higher valuation multiple than Nvidia. So does Walmart.

Yet neither of those stocks offers the growth prospects of Nvidia. With that duo combining for over 20% of the Consumer Staples SPDR's portfolio, investors betting on this ETF may be left disappointed while paying up for that ominous feeling.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale, Nvidia, and Walmart. The Motley Fool has a disclosure policy.