The surge in interest rates this year, especially at the short end of the yield curve, has given income investors an attractive place to put their money as stocks have dropped and inflation has put a premium on larger payouts. That has created a large appetite for short-duration ETFs, which allow investors to more easily access what has become the most lucrative part of the bond market. Several of the funds are raking in cash from investors. The JPMorgan Ultra-Short Income ETF ha s pulled in more than $3.5 billion of new money this year. The SPDR Bloomberg 1-3 Month T-Bill ETF has attracted more than $7 billion in inflows, and the iShares Short Treasury Bond ETF has been showered with nearly $10 billion of new funds. Those flows have chased solid performance, as longer-dated bond portfolios have been hurt by rising rates. The JPMorgan fund, for example, is nearly flat for the year on a price basis, while its monthly distribution has more than tripled since December. Source: FactSet; return data as of 9/15 The space is attracting new entrants as well. AllianceBernstein launched its first ETFs last Wednesday, including the AB Ultra Short Income ETF , a fund that invests in debt with less than one year to maturity. Noel Archard, the firm’s global head of ETFs, said that AllianceBernstein decided in February to include these funds among their first ETF offerings. “Realistically, we were saying this is most likely going to be a volatile year, with maybe some potential for interest rate increases,” Archard said. That looks prescient now. With the Fed expected to announce another big rate hike on Wednesday , and traders growing increasingly concerned about a global recession, short-duration fixed income could be an attractive trade for the foreseeable future. Further inversion risk “We believe that two trends will continue to dominate the bond markets into 2023: a flat to inverted yield curve and heightened volatility. The faster and more forceful the pace of Fed rate hikes, the higher the risk of recession and the more likely the yield curve will invert further,” Kathy Jones, chief fixed income strategist for the Schwab Center for Financial Research, wrote last week . An inverted yield curve refers to short-term yields that are higher than longer-dated yields. For example, the one-year Treasury bill yielded almost 4% on Friday against 3.45% for a 10-year Treasury note. The combination of quickly rising interest rates and an inverted yield curve creates a couple of benefits for short-duration funds. For one, with short-term Treasury yields approaching 4%, investors can get a risk-free return far higher than the 1.6% yield on the S & P 500, and also above many longer-dated fixed income instruments. Short-term funds also limit reinvestment risk. If yields stay higher for longer, short-term funds will be able to reinvest payments and principal from maturing paper into new, higher yielding issues. Funds holding 10-year products, however, would simply see the market value of their asset decline while their coupon payments become relatively less attractive. Notable differences There are differences among many of these funds that investors should be aware of. Those that dabble in corporate debt or even foreign government bonds carry more risk than U.S. Treasury-only funds. Municipal debt, which has tax advantages compared to other sources of fixed income, presents other wrinkles that may affect fund performance. For example, another new AllianceBernstein fund is the AB Tax-Aware Short Duration Municipal ETF , which will always hold at least 80% of its assets in short-duration municipal bonds but has the flexibility to look elsewhere if tax-advantaged local government debt looks relatively unattractive. Were the fund to see Treasurys’ after-tax yield “look more attractive than the AAA munis of a comparable duration, then we might go and pick that up just for the yield pickup,” Archard said. AllianceBernstein’s municipal ETF has a management fee of 0.27%, while the fee on the ultra short income fund stands at 0.25%.