Gold hit the skids last year, with the SPDR Gold Shares ETF (GLD) down 28.33%. But the worm has turned this year with GLD up 3.53 percent year to date versus a 1.77 percent decline in the S&P 500 index. With equity markets roiled by Federal Reserve policy and leadership transition issues, and emerging markets contributing to a “risk-off” market so far this year, financial advisors might consider adding gold back to client portfolios. Which exchange-traded funds are worth looking at, and which ones should be avoided?

At the research company Morningstar Inc., picking a gold ETF comes down to price. “The one we like the most is the least expensive, the iShares Gold Trust (IAU)," says Ben Johnson, Morningstar’s director of passive funds research. The fund's expense ratio is 25 basis points. 

"If you want exposure to this asset, we think it makes sense to look for the lowest cost exposure and that is what IAU offers,” Johnson says.

Among IAU's competitors, GLD's expense ratio is 40 basis points and the ETFS Physical Swiss Gold Shares (SGOL) fund charges 39 basis points.

Johnson believes there is little difference between the ETFs when it comes to offering exposure to the price of gold. “The difference between GLD and SGOL is the location of the physical gold,” he says. “If you feel that you can sleep better at night knowing your gold is in Zurich as opposed to London, where GLD keeps its bullion, you may prefer SGOL.”

Johnson is not enamored with ETFs that offer exposure to gold mining companies such as the Market Vectors Gold Miners ETF (GDX) and Market Vectors Junior Gold Miners ETF (GDXJ). “The gold miners ETFs have proven not to be a good way of betting on gold prices,” he says. “Gold miners in general have done a tremendous job of misallocating shareholder capital over time. Their hedging and investment programs have been consistently ill timed.”

Joseph Schwarz, a partner at Schwarz Dygos Wheeler Investment Advisors, a Minneapolis-based firm with $115 million in assets, says he prefers GLD and the Sprott Physical Gold Trust Common (PHYS) fund. The latter is a Canadian-based closed-end trust run by Eric Sprott, a noted natural resources investor.

Schwarz believes PHYS is a better investment in certain circumstances. “Technically, the GLD holds the physical [product], but there is a momentum factor as they buy more gold,” he says. “In contrast, PHYS holds a fixed amount of gold, and the exchange-traded fund will trade at a premium or discount. PHYS currently trades at a .1 percent discount. At one point in 2010 it traded at a 20 percent premium.”

On the other hand, Schwarz says he’ll opt for GLD when he simply wants to play the spot price of gold because it has the most liquid exposure.

Schwarz is wary of both leveraged gold ETFs, which he says have consistent tracking errors over multi-day holding periods, and ETFs focused on gold miners. “Gold miners did not match the upside when gold was going up, but declined more than the physical when it was going down,” he says. “They have political and labor risks, and are notoriously bad hedgers.”

In the past, Schwarz has held up to 10% of his portfolio in gold. But last year he sold his entire position in the shiny metal. He says he’s currently re-evaluating his position. “If inflation rises, stocks will probably rise along with gold,” notes. “Gold is a good inflation hedge, and with the relative performance in 2013 I think it is a more attractive asset class.”

He adds that the S&P 500 index was up 31 percent last year versus gold’s 27 percent drop, which marked the biggest relative underperformance by a wide margin in the past 15 years.

That said, certain macro scenarios could bode poorly for the precious metal. “If Yellen continues to taper, the gold ETFs could continue to underperform,” Schwarz says. “As interest rates rise the payoff for a zero interest rate asset is less attractive.”

While advisors will need to determine their willingness to make macro forecasts and to add gold to their portfolios, gold should remain a preferred asset if confidence in equities and bonds falter. Adding ETFs with physical ownership of gold––and eschewing the equity shares of gold mining firms––might be a useful way of reducing risk in client portfolios.