With school openings uncertain for the fall and the threat of a fresh round of stay-at-home orders in big U.S. cities and in other parts of the world, investors may be looking for a way to get in on the burgeoning field of online learning. Below, we look at the investment thesis behind this theme and how to invest into it.
The pandemic has likely been a transformational event for digital education. The COVID-19 forced millions of students at all levels to adapt to a new, alternative way of receiving an education. Globally, over 1.2 billion children were out of the classroom when COVID became a Pandemic back in March 2020 (see chart below).
Chart: COVID-19’s staggering impact on global education (source: Statista)
The shutting down of educational institutions during the crisis showed how distance learning can change the system, and this might be the first stages of what becomes a structural shift that benefits companies which provide tutoring, work skills, and more.
Indeed, research suggests that online learning has been shown to increase retention of information, and take less time, meaning the changes coronavirus have caused might be here to stay. With this sudden shift away from the classroom in many parts of the globe, some are wondering whether the adoption of online learning will continue to persist post-pandemic, and how such a shift would impact the worldwide education market.
Even before COVID-19, there was already high growth and adoption in education technology, with global edtech investments reaching US$18.66 billion in 2019 and the overall market for online education projected to reach $350 Billion by 2025. Whether it is language apps, virtual tutoring, video conferencing tools, or online learning software, there has been a significant surge in usage since COVID-19. While some believe that the unplanned and rapid move to online learning – with no training, insufficient bandwidth, and little preparation – will result in a poor user experience that is unconducive to sustained growth, others believe that a new hybrid model of education will emerge, with significant benefits (source: weforum.org).
How to invest into this theme?
One way to get exposed to this theme is to invest into companies that facilitate digital learning and educational content publishing. The exposure can be diversified by picking companies which are covering the needs of various education levels and this across different countries in the world. The goal is to identify “pure-play companies”, i.e those with greater than 50% revenues derived from facilitating education.
Stocks from companies with significant exposure to the theme
- TAL Education Group (TAL)
- New Oriental Edu & Tech Group (EDU)
- GSX Techedu Inc (GSX)
- Zoom Video Communications Inc (ZM)
- Pearson PLC 6.41% (PSON LN)
- Bright Horizons Family Solns Inc (BFAM)
- Chegg Inc (CHGG)
Back in July of this year, Global X launched a dedicated ETF, the Global X Education ETF (EDUT).
The Global X Education ETF (EDUT) tracks the Indxx Global Education Thematic Index. This ETF is invested into 34 holdings which include companies involved in “online learning and publishing educational content, as well as those involved in early childhood education, higher education, and professional education,” according to the issuer.
EDUT features exposure to six industries. While higher and professional education is the largest of those at a weight of 25%, EDUT shows it's built for the current environment of increased online education with a combined weight of more than 46% to online learning companies and video communications providers.
“According to an EY-Parthenon survey conducted at the height of the pandemic, 70% of students reported using third-party technology solutions to continue their education at home,” notes Global X. “While we believe social distancing will remain a consistent theme even after the pandemic runs its course, these technologies are appealing for reasons beyond idiosyncratic events.”
Note that EDUT charges 0.50% per year. The ETF size remains relatively small at around $2 million assets under management.
Chart: Global X Education ETF (EDUT) – breakdown by geography and sector – as of end of June 2020
Stocks related to the distance learning theme have been doing very well since the start of the Pandemic and ensuing lockdowns. Most valuation ratios are expensive and in case of positive surprise on the Covid side (end of the Pandemic, vaccine, etc.), one could expect investors to turn less bullish the sectors, at least in the short-run.