A blend fund, also known as a hybrid fund, is a mutual fund or ETF that invests in a mix of value stocks, which are stocks thought to be undervalued by the market, and growth stocks, which are stocks of companies expected to grow earnings at a faster-than-average rate.
What is a value stock?
The term "value stock" refers to a stock considered to be undervalued in relation to the overall market, or to the stocks of similar companies. A stock can appear undervalued for a few possible reasons – such as fundamentals that make the price appear too low, or a higher-than-normal dividend yield.
For example, if the average large-cap telecom stock pays a 4% dividend yield, and one pays 5%, it could be a sign that the stock is priced too low. Or, if the average big-box retailer is trading for 16 times earnings and there's one trading for just 13 times earnings, it could also be a sign of a potential value investment.
It's important to mention that just because a stock appears to be undervalued doesn't necessarily mean that it is. When researching possible value stocks, investors should make sure there isn't a good reason for the cheap valuation, such as an internal problem with the company.
What is a growth stock?
A growth stock is the stock of a company expected to grow its revenue and earnings faster than the average company in the market, or than its peer group. For instance, if the average company is projected to grow its earnings at an average rate of 7% over the next five years, a company expected to grow at a 12% rate could fit into the "growth stock" category.
In general, growth stocks don't pay high dividends. Instead, since they're growing so quickly, they often prefer to invest as much capital as possible back into their business in order to fuel future growth.
An example of a blend fund and its holdings
The T. Rowe Price Dividend Growth Fund (NASDAQMUTFUND:PRDGX) is an example of a blend fund that focuses on large-cap stocks. The fund has the investment objectives of dividend income that will grow faster than the inflation rate, as well as capital appreciation.
To illustrate why this is a blend fund, consider its top 10 holdings:
- Becton, Dickinson & Co. (Growth)
- Comcast (Blend)
- Danaher (Growth)
- General Electric (Blend)
- JPMorgan Chase (Value)
- Microsoft (Blend)
- PepsiCo (Blend)
- Pfizer (Value)
- UnitedHealth Group (Growth)
- Visa (Growth)
So the fund has a good mix of growth and value stocks, as well as several stocks that have both growth and value characteristics.
The best of both worlds?
Blend funds can be good choices for investors who want exposure to different types of stocks and want to combine the relative stability of value stocks with the high potential of growth stocks.
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