The ternary blends of high-density polyethylene (PE), EPDM terpolymer and polypropylene (PP) have been used as a model low interfacial tension system to study encapsulation dynamics in ternary blends and their relation to the blends' mechanical properties. It was found that the modulus, tensile strength and impact resistance can be improved by PE addition if the PE is localized within the EPDM phase. A range of blend morphology was found depending on the PE viscosity and polymer incorporation sequence in the twin-screw extruder. In the most favorable sequence, PE and EPDM were mixed together prior to their dispersion in the PP matrix. This practice resulted in a 50% increase in impact resistance when compared to mixing the three components in a single-step.