What Is a Hybrid Fund?

A hybrid fund is an investment fund that is characterized by diversification among two or more asset classes. These funds typically invest in a mix of stocks and bonds. They may also be known as asset allocation funds.

Key Takeaways

  • A hybrid fund is a classification of a mutual fund or ETF that invests in different types of assets or asset classes to produce a diversified portfolio.
  • Balanced funds, which hold typically 60% stocks and 40% bonds are a common example of a hybrid fund.
  • Blended funds, which mix growth and value stocks, are another hybrid fund example.

Understanding Hybrid Funds

Hybrid funds offer investors a diversified portfolio. The term hybrid indicates that the fund strategy includes investment in multiple asset classes. In general, it can also mean that the fund uses an alternative mixed management approach.

Hybrid funds are commonly known as asset allocation funds. In the investment market, asset allocation funds can be used for many purposes. These funds offer investors an option for investing in multiple asset classes through a single fund.

Hybrid funds evolved from the implementation of modern portfolio theory in fund management. These funds can offer varying levels of risk tolerance ranging from conservative to moderate and aggressive.

  • Balanced funds are also a type of hybrid fund. Balanced funds often follow a standard asset allocation proportion, such as 60/40.
  • Target date funds or lifecycle funds also fit into the hybrid category. These funds invest in multiple asset classes for diversification. Target date funds vary from standard hybrid funds in that their portfolio portions begin with a more aggressive allocation and progressively rebalance to a more conservative allocation for use by a specified utilization date.
  • A blend fund (or blended fund) is a type of equity mutual fund that includes a mix of both value and growth stocks. These funds offer investors diversification among these popular investment styles in a single portfolio.

In all cases, hybrid funds will include some mix of two or more asset classes. In risk-targeted and balanced funds, allocations will typically remain at a fixed proportion. In funds targeting a specified utilization date, the proportion of asset mix will vary over time. In all of the funds, the investment manager may actively manage the individual holdings within each asset category to respond to changing market conditions and potential capital appreciation opportunities

Examples of Hybrid Funds

Investment managers offer a wide range of options for hybrid funds. Below are two examples.

Vanguard Balanced Index Fund (VBIAX)

This fund has a 60/40 balance among stocks and bonds. The stock portion of the portfolio seeks to replicate the CRSP U.S. Total Market Index. The bond portion of the portfolio seeks to replicate the Bloomberg Barclays U.S. Aggregate Float Adjusted Index. The fund has an expense ratio of 0.06% as of Q2 2021.

T. Rowe Price Retirement 2060 Fund (TRRLX)

The T. Rowe Price Retirement 2060 Fund is a hybrid target-date fund. As of May 2021, it had more than 90% of the portfolio in stocks and approximately 8% in bonds and other fixed-income securities. The fund uses a fund of funds approach with 19% of the portfolio in a growth stock fund. The fund has an expense ratio of 0.71% as of Q2 2021.