Code Acts in Education: Edtech Index Investing
While schools were closed for much of the year, new market opportunities were opening up for education technology investors. The investment bank BMO Capital Markets predicted potential market growth early. ‘While we are uncomfortable citing “winners” in the coronavirus situation, some companies may be positioned better than others,’ it stated in March. ‘Specifically, those that specialize in online education could see increased interest should the situation worsen’, it suggested, such as K12 and Pearson. The situation did worsen, and with mass school and college closures, edtech became a hot sector for venture capital investment. By September, the number of edtech companies valued as unicorns—businesses worth a billion dollars or more—had risen to 20, primarily online learning and home tutoring platforms based in China or the US.
Two specific edtech investment events stand out from this period of heightened market activity in education. In July, the New York-based investment management organization Global X launched a new exchange traded fund (ETF) for the edtech sector, followed in September by the announcement of another edtech ETF by Rize, a London-based ETF issuer focused on ‘thematic’ investments in global ‘megatrends’.
ETFs are complicated financial instruments, but they have strong potential to shape the direction of edtech investment, to catalyse and grow edtech markets, and, via driving investment in specific companies, to drive the direction of further edtech development. Like other funding models, such as direct venture capital investment, philanthropic grants, and private equity in specific edtech companies, they may have a productive part to play in the future directions that education takes, particularly in the long period of post-Covid recovery. As a result, it’s important for edtech research and education policy analysis to get to grips with the emerging financial technologies and the new social actors that may shape the future of the sector. This post is a very preliminary attempt to identify some of the actors and devices involved in new forms of edtech index investing.
Exchange traded funds can be thought of as ‘baskets’ of shares in a collection of companies. The value of shares in each company fluctuate with daily market movements, and the price of an ETF’s shares will change throughout the trading day as the shares are bought and sold on the market. For investors the return comes from gains from the basket overall, for the fund manager the return comes in the form of fees, and for companies with share holdings in the ETF the benefit comes from increased investment.
The significance of the launch of these two edtech-specific ETFs is that ETFs have become extraordinarily powerful models for investing due to their tax efficiency and liquidity (how quickly investments can be converted back to cash), though they have also been implicated in market flash crashes and instability (as a result of overinflating stock values). By 2017, over $4 trillion was invested in ETFs worldwide.
ETFs are part of a family of financial instruments known as index investing. In index investing, market indexes representing particular financial markets, or market subsectors, are used as benchmarks to gauge the movement and performance of market segments. An index is a mathematically weighted calculation of a market based on the prices of the underlying holdings. Investors then use indexes as a basis for portfolio or passive index investing, of which ETFs are a key instrument.
Although some ETFs are based on indices of massive markets such as Nasdaq, a very wider variety of sector-specific ETFs have also been created. Sector ETFs use the Global Industry Classification Standard as the primary financial industry standard for defining sector classifications. This has led to ETFs for sectors as diverse as social media, minerals mining, medical technology, and, now, educational technologies.
By creating sector-specific edtech exchange traded funds, Global X and Rize have constructed new financial instruments to track the performance of the edtech market, and to catalyse investment in it. Investors in edtech are now able to invest ‘passively’ in shares in the whole ETF–assets which Global X and ETF then manage on investors’ behalf– rather than ‘actively’ purchasing more risky single-stock shares in individual companies.
This potentially makes Global X and Rize into incredibly powerful influences in the edtech sector overall. They have the financial and methodological expertise to generate edtech market indices—ultimately defining the benchmark for edtech market performance—and to compile the holdings in the fund. By creating indices, they act as gatekeepers defining which companies from the wider ‘universe’ of the edtech sector are eligible for inclusion in the ETF. They are shaping the edtech market. In a context where edtech has become increasingly influential in education, to a significant degree this also means that Global X and RIZE have positioned themselves to reshape education itself. As Rize puts it, the LERN ETF ‘provides investors with exposure to “EdTech” companies that are redefining how education is accessed, resourced and consumed around the world to deliver positive results for the individual and society’.
Global X and Rize are both clear that their edtech ETFs are intended to support companies in the business of educational transformation. Before we go into the particular transformative ideas they are seeking to fund, and the specific companies included in their ETFs, however, it is worth looking a little more into the composition and aims of these organizations.
Global X was founded in 2008 as a specialist ETF provider. Though it offers core ETFs indexed to stock markets, its specialism is sector ETFs, particular thematic ETFs in ‘disruptive technologies’ and ‘people and demographics’. Its portfolio of ETFs in these categories include Robotics and AI, Internet of Things, Cloud Computing, Social Media, Genomics and Biotechnology, and Education. Compared to some of the other categories, the education ETF is a fairly small fund with a value of $5.4million (compared to $7.4bn value of its Robotics and AI ETF), which it launched on the Nasdaq in July 2020. It is based on an index called the Global Education Thematic Index produced by Indxx, a global financial services and index provider.
The all-male staff of Global X have previous experiences and roles in business analysis, investment banking, wealth and asset management, finance, entrepreneurship, and various qualifications from business schools and economics. In 2018 Global X was acquired by Mirae Asset Global Investments, a Seoul-based financial services company providing asset management, wealth management, investment banking, and life insurance.
Rize is a much more recent entrant into the ETFs sector. Founded in 2019 in London, Rize is Europe’s first specialist thematic ETF issuer, with a product portfolio of specialized thematic ETFs focused on key ‘megatrends’. They include Cybersecurity and Data Privacy, Future of Food, Medical Cannabis and Life Sciences, and Education Technology and Digital Learning (LERN). The total assets in the LERN fund, launched on the London, Milan and Berlin stock exchanges in September 2020, stand at just under $1million.
Like Global X, its staff are experienced in asset management, investment management and portfolio management. Its all-male staff are all former Legal and General employees and responsible for the creation of the Canvas ETF platform at ETF Securities that L&G acquired for AUS$3.5bn in 2018. These asset managers have now brought their combined expertise in business, economics, law, mathematics, and computer science to bear on the financialization of edtech.
Importantly, however, these ETF companies are also part of complex webs of organizational relationships. Taking Rize as an example, its LERN ETF is a collaboration with Foxberry and HolonIQ. Foxberry is an independent index management company based in Canary Wharf. Its specialist contribution to the Rize ETF is to construct the benchmark index which the fund is designed to track. The other partner, HolonIQ is an international edtech market intelligence organization headquartered in Sydney, Australia. Listed as the ‘thematic expert’ on the ETF, HolonIQ utilized its extensive edtech market datasets to establish the index, which will be updated twice a year to reflect the performance of holdings in the fund.
HolonIQ’s involvement in the LERN fund is arresting because over the last few years it has become a high-profile edtech market intelligence organization. It produces weekly market updates and forecasts, detailed in spectacular data visualizations. During the Covid pandemic it estimated the total value of the edtech sector at $404bn by 2025. It also produced a Global Learning Landscape of hundreds of companies that it saw as transformative in the education sector. By partnering with Rize and Foxberry, HolonIQ has diversified its role from the cataloguing and forecasting of edtech markets to being an active catalyst of market growth. Its Global Learning Landscape does not just visualize a forecast future, but is the basis for the LERN ETF that will shape and guide financial investment in the future of edtech.
The two edtech ETFs both focus on investing in companies that stand to play key roles in transforming education. Both ETFs are based on a powerful imaginary of the future of education as digitally enhanced by the involvement of commercial edtech companies, whose shares they are actively investing in.
Announcing the launch of its education ETF, Global X stated:
The Global X Education ETF (EDUT) seeks to invest in companies providing products and services that facilitate education, including online learning and publishing educational content, as well as those involved in early childhood education, higher education, and professional education.
Among the companies included for investment in the ETF are online learning and MOOC providers (which it termed ‘Education-as-a-Service’), digital publishing (Pearson), and providers of artificial intelligence in education services:
Artificial Intelligence (AI), for example, can leverage machine learning to understand students’ individual needs, then designing and adapting curriculums to meet them. Implementing AI could augment learning by ensuring that students strengthen their weakest areas. It also optimizes teaching by reducing teachers’ upfront workloads, sparing them time that they could allocate elsewhere. We can already see mass-implementation of such technology in China and are starting to see less sophisticated rollouts of it in the US. By 2025, global AI-EdTech expenditure is projected to reach $6B.
Its estimate of AI-edtech expenditure was itself based on HolonIQ market forecasts.
Likewise, the Rize ETF of which HolonIQ is a partner is centred on a particular vision of the future of education:
The Rize Education Tech and Digital Learning UCITS ETF (LERN) seeks to invest in companies that potentially stand to benefit from the increased adoption of digital and lifelong learning technologies such as personalisation and adaptive learning, video content, gamification and immersion technology that are changing the way people learn.
digital learning technologies can help elevate the education sector into the 21st century. We must build an education system that is more inclusive, no longer confined to the classroom, and which is able to transform all learners into lifelong learners. At a time of unprecedented automation, reskilling and upskilling have never been more vital, and advanced technologies such as gamification, virtual and augmented reality, and personalised and adaptive learning allow education to be tailored to people’s needs as they move through their lifecycles.
Both Global X and Rize have positioned investment in the imaginary of edtech as a kind of moral imperative, not least in the context of post-pandemic transformation of education systems to meet emerging social and technical demands. The LERN brochure for investors even invokes the UN Sustainable Development Goals of quality education, decent work, and reducing inequalities, suggesting that investment in the fund will support progress towards these international targets.
The companies that Global X and Rize have invested in through their respective funds illustrate what they see as market leading edtech organizations with potential for high market growth performance. Notably, they both include a number of huge China- and US-based edtech organizations.
Three of the top five holdings in the Global X EFT are large Chinese edtech groups: GSX, TAL and New Oriental. Zoom, Chegg, K12 and Pearson (itself a market-making company) are among other well-known companies in these holdings. Similarly, New Oriental, GSX and TAL are in the top 5 holdings of the Rize LERN ETF too.
Despite the transformative claims of Global X and Rize, some of these companies have questionable market credentials. GSX TechEdu, for example, provides after-school home tutoring software with embedded big data analytics. It experienced surging customer demand during the pandemic and corresponding growth in share value–reportedly increasing its active users to 1.5million and revenue growth of more than 300% year-on-year. However, many US investors have questioned its financial reports and some have claimed it is an outright fraud based on fake student enrollment and course numbers, leading to a probe by the US securities regulator.
The US-based online learning platform provider K12 has also been the subject of controversy. K12 was predicted by BMO Capital Markets to be a ‘winner’ if the Covid situation worsened. However, its $15.3million no-bid contract with one of the largest public school districts in the US was cancelled in September 2020 after a series of technical problems prevented students from taking classes, raising concerns about the impact on investors. Its president moved quickly to downplay the effects on its financial position, and K12 also announced a virtual investor day to present the company’s long-term vision and growth strategies, capital allocation framework, and operational and financial objectives.
These controversies indicate some potential faultlines between market valuations and the mundane reality of edtech use. The professional asset managers at Global X and Rize, supported by their index producers and market intelligence providers, are highly distant from the points of use of edtech. They remain in the abstracted domains of discursive imaginary generation and statistical valuation, disinterested in the actual performance of edtech in classrooms while promoting its performance in financial markets.
Edtech market devices
It is hard to know what tangible effects these two exchange traded funds will exert on education in the long term. Their effect could be to shape edtech markets in ways that suit the long term visions and strategic priorities of key edtech companies, particularly those that treat online learning and AI-based personalized learning platforms not just as emergency responses to the pandemic but as solutions to longstanding problems of schooling. Inclusion in the indices certainly seems to confer market leadership on the selected companies and invests a kind of authority in their strategic visions of education. In other words, these index investing instruments might help materialize edtech imaginaries, ultimately funding the future into existence according to consensual visions amongst edtech companies, market intelligence agencies and investment intermediaries. Rize claims it ‘enables investors of all stripes to invest in the future’.
Already, it certainly seems clear that edtech companies and index investment firms such as Global X and Rize are talking the same language and investing in the same imaginary of future educational transformation. They understand edtech as a profitable market niche, but also treat education itself in market terms–as a sector dedicated to the cultivation of productive skills for the post-Covid digital economy that are best delivered by private providers. ‘Maximizing one’s education is the best way to stay competitive in today’s global labor market,’ Global X stated on announcement of its ETF. ‘But as demand for education surges around the world, old and deeply-entrenched institutions are largely failing to rise to the challenge’. Furthermore, market intelligence firms such as HolonIQ now act as brokers between edtech and asset managers, using their extensive catalogues of edtech market insights to actively catalyse new investment in this imaginary.
From a research perspective, these forms of index investing require research on edtech to turn to some unfamiliar sources for analytical assistance. Some relevant emerging research on ETFs has begun to emerge from economic sociology and the political economy of markets. Benjamin Braun, for example, has studied ETFs as specific kinds of social and technical ‘market devices’ and as the products of new ‘powerful financial intermediaries’. Asset management firms and professionals that pool and manage ‘other people’s money’, such as through ETFs, have become enormously influential in the functioning of financial markets.
The emphasis on ‘market devices’ in the sociology of markets and economics emphasizes that markets have to be made, including through the social construction of practical devices, artefacts, calculations, methodologies and technologies, and that they then exert real effects. From this perspective, index investing instruments such as ETFs are devices constituted from entangled human practices and technical artefacts that produce effects in market spaces. For Braun, as ETFs have become multitrillion dollar investment vehicles, the asset managers who produce and administer them have become increasingly central to the functioning of contemporary capitalism itself. ETFs are therefore micro-level market devices that are key to the macro-dynamics of an emerging form of ‘asset manager capitalism’.
The launch of the Global X and Rize LERN exchange traded funds need therefore to be understood as part of a shift in the microfoundations of capitalism. Asset managers and their index investment devices have become increasingly powerful to whole economies, and index investing has expanded to generate value from a vast range of sector, now including education. Perhaps edtech and exchange traded funds will, over time, become increasingly interdependent, with index investing instruments and asset managers becoming key to the growth and direction of edtech markets, and edtech increasingly understood as a sector for capitalization by asset managers and investors. At the very least, policy-focused research needs to acknowledge and further interrogate index investing as an emerging technique of education financialization in the global education industry, complementing existing forms of investment in education such as venture capital, private equity and impact investing.
As particular market technologies, ETFs are now interweaving with edtech and with the financialization of education more broadly, making asset manager capitalists into unusual but potentially influential figures in the shaping of education for the future.
September 29, 2020