Cathie Wood's ARK Innovation ETF (ARKK 1.05%) is always rebalancing its stock portfolio. The fund sold 51,155 shares of electric-vehicle veteran Tesla (TSLA -1.11%) on Wednesday, effectively moving $14 million from that stock to video game platform Roblox (RBLX 1.35%).
This sale extended a long-running streak to 13 consecutive trades where the fund reduced its Tesla ownership. ARK Innovation hasn't bought Tesla shares since April 26, siphoning a total of 729,582 shares out of its largest holding during that span.
Has Cathie Wood lost patience with Tesla, or is she simply turning some paper profits into solid cash? Let's take a look.
Tesla is still the king of ARK Innovation's castle
First of all, ARK Innovation is not cashing in all of its Tesla holdings. In fact, the fund's total reliance on Tesla has stayed quite steady in recent months. Tesla accounted for 11.2% of ARK Innovation's total holdings in early June, just before the start of the selling streak. Today, the stock holds 11.4% of the innovation-oriented ETF's total assets.
The lower number of remaining Tesla shares is balanced out by a rising stock price. Tesla investors have pocketed a 27% return across the same period. The volatile ticker has gained 124% year to date. Under these circumstances, ARK Innovation's cash-sipping moves make perfect sense.
Tesla is on a roll, but the stock is also prone to sudden crashes. You never know when the next Tesla dip might come along, reducing the purchasing power of your Tesla-based profits. The stock's 52-week returns are actually negative right now.
It's safe to say that Cathie Wood and her fund managers are skimming some profits off the frothy Tesla stock in order to boost investments in other ideas. For example, this Wednesday's substantial Tesla sale was matched by a Roblox buy of almost exactly the same size.
This actively managed exchange-traded fund (ETF) targets long-term returns by investing in disruptive innovators. Tesla has earned its spot as the largest holding in ARK Innovation by steering the auto industry toward a gas-free future. The company is also a leading innovator in alternative-energy solutions, and its supercomputer for self-driving systems development could unlock new business opportunities in the artificial-intelligence (AI) market.
Why Cathie Wood is leaning into Roblox
Roblox is a very different story. This stock is down 31% since Nov. 4, 2022, and ARK Innovation has been adding to its Roblox holdings in this period. Wood's active style of fund management lets her take profits on soaring success stories like Tesla while taking advantage of falling stocks such as Roblox.
The platform operator for massively multiplayer online games saw its skyrocketing sales growth stall last year, but the annualized growth rate is back to double-digit percentages again. Roblox stock has fallen nearly 80% from the all-time peak of November 2021, when the global inflation crisis poured cold water on growth stocks everywhere.
Despite the constant cash investments, ARK Innovation's exposure to Roblox has declined from 3.4% to 2.9% in 10 months. If the company gets back on its feet again, Cathie Wood will look like a genius for grabbing lots of shares on the cheap. The stock could also be a falling knife in the end, tarnishing Wood's stock-picking reputation and hurting the fund's short-term returns.
ARK Invest is playing the long game
All things considered, shuffling some Tesla-based profit into the promising Roblox opportunity looks like a savvy fund-management move. It may not be the right idea for every investor, but this is a good fit with ARK Invest's deep-pocketed hunt for promising growth stocks.
Cathie Wood's ARK Innovation fund is keeping a tight grip on its enormous Tesla investment, scraping off just enough to place a meaningful bet on Roblox's promising turnaround story. It's a low-risk move with potentially huge long-term returns. And the lucrative Tesla position continues to generate helpful cash returns for the fund.
