How does a large stock buyout like Twitter affect index fund shares?

[RusticBohemian]

In a buyout like we're seeing with Twitter, with many index funds holding shares of the company and individual investors holding shares of those index funds, how does a stock buyout work? Will the index fund be paid the buyout price for its holdings and then it will reallocate this money toward other stock purchases? Is it a net gain for the index fund?

[js82]

Will the index fund be paid the buyout price for its holdings and then it will reallocate this money toward other stock purchases?

Pretty much, yes.

Is it a net gain for the index fund?

On the twitter transaction in isolation, yes.  But if it's a market-weighted index fund, Musk's Twitter offer also cratered Tesla shares, and Tesla has over 20x Twitter's market cap.  Net effect on a typical index fund that includes both companies would be negative, unless Tesla fully recovers to the point at which this offer has zero impact.

[maizefolk]

In a buyout like we're seeing with Twitter, with many index funds holding shares of the company and individual investors holding shares of those index funds, how does a stock buyout work? Will the index fund be paid the buyout price for its holdings and then it will reallocate this money toward other stock purchases? Is it a net gain for the index fund?

Pretty much was Js82 said. If you are holding mutual funds rather than ETFs for your index funds, it may result is a modestly larger capital gains distribution and associated increase in your tax liability. But we're talking a fraction of a percent.