Meet This Year's Best Materials ETF

The Materials Select Sector SPDR XLB is up 17.7 percent, a performance that's good for one of the better showings among the widely followed sector SPDR exchange traded funds and one that underscores the strength in the materials sector.

However, XLB and comparable materials ETFs aren't close to being the best materials ETF in 2016. That honor goes to the PureFunds ISE Junior Silver ETF SILJ, which is an impressive factoid considering the recent, stunning retrenchment experienced by precious metals miners equities and ETFs.

Year In Review

With a year-to-date gain of just over 132 percent, SILJ remains one of 2016's best-performing non-leveraged ETFs. On its own, that's an accomplishment, but that accomplishment is particularly notable and possibly concerning when considering SILJ has tumbled 25.5 percent in the fourth quarter and resides 40.5 percent below its 52-week high reached in August.

SILJ's underlying index “is designed to reflect the performance of small-capitalization companies involved in the silver industry, including companies that mine, explore and refine silver. The stocks are screened for liquidity and weighted according to modified free-float market capitalization. The Index generally is comprised of 20-30 securities,” according to PureFunds.

More Demand

Demand trends also bode well for SILJ and its holdings. The U.S. Mint is currently boosting production of silver coins due to increased investor demand and industries, such as healthcare and technology, are expected to more than triple nanosilver demand over the next seven years.

As has been the case with its gold mining brethren, SILJ has been challenged by the rising U.S. dollar, a scenario that could extend into 2017 if the Federal Reserve makes good on its pledge to boost interest rates as many as three times. It's not a coincidence that SILJ is lower by 9.5 percent over the past month while the U.S. Dollar Index is higher by 2.5 percent over the same stretch.

However, catalysts remain for precious metals such as slack earnings growth in the US and low and negative yields on sovereign debt throughout the developed world. Said another way, even a couple of rate hikes here in the United States would not be long-term damaging to gold and silver.

Rising inflation and silver's low correlation to other assets, such as stocks and bonds, could be other catalysts for the white metal and SILJ in 2017, but the biggest boost for the ETF would likely come by way of dollar retrenchment.