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2 Defensive ETFs To Consider For A Sideways Market

|Includes:iShares Nasdaq Biotechnology ETF (IBB), XLU

With the Dow Jones Industrial average retreating under 13,000 and the S&P 500 pulling back to under 1400 two ETFs that continue to show upside performance are the iShares Nasdaq Biotechnology Fund (NASDAQ:IBB) and the Utilities Select Sector SPDR Fund (NYSEARCA:XLU). With the markets digesting news from Europe and China in different ways investing in stocks or ETFs can sometimes be challenging.

The IBB and the XLU can be seen as defensive names that are less volatile and provide stability in a market that is trading in a range. When looking at prior ETF performance over the last month the IBB is up 6% from April 11, 2012 close of $119.20 to the current price of $126.43 on May 11, 2012 and the XLU is up 4.6% from April 11, 2012 close of $34.34 to the current price of 35.93 on May 11, 2012.

The month of May can be harsh on the markets and individual stocks, but both the IBB and the XLU have been gaining traction despite the decline in the S&P 500. Both of these defensive ETFs are still outperforming the S&P 500 in the month of May and are poised to continue to slowly move higher.

Chart foriShares Nasdaq Biotechnology

iShares Nasdaq Biotechnology Fund

Weather investors have invested in biotechnology companies or not this sector can sometimes be a tough sector to invest into. There are a lot of times that a biotech company's share price can dramatically rise or fall for a number or reasons. Some of these reasons include FDA approval, results of Phase III trials or discontinued funding. For investors who can find it difficult to invest in a single biotech company and want less risk, then selecting a biotech ETF may be the way to go. The IBB consists of companies that use biomedical research to improve health, find cures and treat diseases of individuals. When looking at a chart of the IBB investors will notice that the IBB has struggled to break the $125 level. On April 2, April 27, May 2 and May 8, 2012 the IBB retreated when the ETF was around the $125-$126 level and with the current price of $126.43 the IBB may be poised to break higher. One of the top holdings in the IBB is Alexion Pharmaceuticals whose share price has been continually going higher and currently in IBB's top ten holdings, none of the stocks are rated a sell. When investing in the IBB investors will also get exposure to many sub-sectors that investors wouldn't be able to get from an individual stock. Some of these sub-sectors include generic drugs, non-generic drugs, biopharmaceutical therapies and companies that specialize in treating certain life threatening diseases. For investors wanting to invest into the IBB I would wait to see if this ETF can hold above the $125-$126 level and if the IBB can, then this ETF should continue to climb higher.

Chart foriShares Nasdaq Biotechnology

Utilities Select Sector SPDR Fund

On February 26, 2012 I presented an options trade on the XLU as an alternative to buying shares and I believe this is another ETF than can continue to quietly climb higher. One of my main reasons for upside performance was that investors might start to cash out gains and move to safer sectors. With the markets seeking to regain its footing the XLU can be a nice ETF for investors to generate yield despite to rocky markets. The XLU tracks the performance of electric utilities, power producers and gas utilities. The XLU also has a dividend yield at 3.90% and has a P/E of 15. When looking at a one month chart of the XLU, the ETF is up 4.6% or $1.59 from April 11, 2012 to May 11, 2012. While natural gas prices have come off their lows, natural gas prices are still relatively cheap and that is benefiting the companies in the utility sector. For investors that want stability on a sector that all people need, then I believe this sector can still perform to the upside despite the shaky markets. Even with the mild winter the XLU didn't see much downside and while I am not a weatherman, if we see a hotter than usual summer the utility sector should be poised to go higher.

Chart forUtilities Select Sector SPDR

In summary investors may look to add to their positions when their favorite stock or ETF pulls back, but another way to take a look at the market is by sticking with the sectors that keep performing. Generally, the XLU and the IBB are not widely talked about and can be seen as boring plays, but as long as boring keeps paying off then these two ETFs should be considered.

Thanks For Reading and Good Luck.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in XLU over the next 72 hours.

Stocks: IBB, XLU