Recently, consumer markets have shown great interest in sustainable products. Considerable research efforts are headed towards developing biodegradable and recyclable polymers and composites. In this study, the fabrication of a wood−plastic composite (WPC) via solid state compounding has been examined. Polyethylene terephthalate (PET) and wood sawdust waste as major components of waste and challenging materials for the manufacturing of WPCs have been explored. Furthermore, the addition of poly(ε-caprolactone) as a biodegradable plasticizing agent was investigated. Composite powders were prepared by cryogenic solid-state milling (cryomilling) according to a statistical mixture design. Mechanical and water absorption properties were inspected on film samples obtained by hot pressing. Different formulations resulted in a variety of colors, textures, water interactions and mechanical properties. A sawdust content of approximately 25 vol.% was optimal for the best combination of properties. The results indicated that cryomilling is technically advantageous in the production of WPCs.