A broad increase in short interest looks like investors protecting profits.

Short interest in the most heavily traded ETFs rose in November, a reversal of recent trends and a sign that investors were looking to protect profits after markets hit post-crash highs last month.

The SPDR S&P 500 ETF (NYSEArca: SPY), the world’s largest ETF by assets under management, saw a nearly 7 percent increase in the number of shares being shorted in November after two straight months of declines. Nearly 43 percent of outstanding SPY shares, representing $36.4 billion, are now short.

Short interest increased by almost 2.5 percent in the small-cap-focused iShares Russell 2000 ETF (NYSEArca: IWM) and nearly 13 percent in the PowerShares QQQ (NasdaqGM: QQQQ), which tracks the tech-heavy Nasdaq-100 Index.

Paul Weisbruch, an ETF trader at King of Prussia, Pa.-based Street One Financial, believes last month’s broad rise in short positions is partly due to outright bearish bets on the direction of the markets.

“The major indexes are at new recent highs, so it doesn’t shock me entirely that short interest is higher,” Weisbruch said.

But Weisbruch also credits year-end hedging by investors looking to lock 2010 gains into their portfolios with boosting short interest last month.

“I think we’re seeing increased hedging activity going into year’s end. I’ve seen protective put buying from people who are sitting on nice gains for the year. They don’t want something to come out of the woodwork and undo that,” he added.

Really, Really Short

Retail, energy and banking ETFs continue to dominate the “Really, Really Short” table, our list of ETFs with the highest percentage of short interest.

The SPDR S&P Retail Fund (NYSEArca: XRT) tops the list with short interest topping the list at more than four times the number of outstanding shares, while the SPDR S&P Oil & Gas Exploration & Production Fund (NYSEArca: XOP) is second, with 308 percent of outstanding shares short.

XRT was notably the subject of a white paper released in September by Bogan Associates that argued that ETFs with such high short interest could potentially collapse or become subject to short squeezes during a market crisis.

IndexUniverse’s Global Head of Editorial Matt Hougan countered this argument by publicly pointing out that all ETFs contain safeguards against the Bogan report’s doomsday scenario. Namely, shareholders looking redeem an ETF with high short interest must prove unencumbered ownership of the shares to the ETF provider before their transaction will be processed.

The fears aroused by the Bogan report aside, Weisbruch believes that XRT is heavily short because of the unique features of the U.S. retail sector.

“It’s such a huge category,” said Weisbruch, “and individual stock pickers rule the day. A lot of firms make a living buying a handful of specific stocks and then hedge their positions using XRT and the Retail HOLDRs [NYSEArca: RTH].”

Data is believed to be accurate; however, transient market data is often subject to subsequent revision and correction by the exchanges.