The headline is exciting—the U.S. is looking to normalize relations with Cuba. Like clockwork, the Internet was full of “how to invest” articles, and as of 11:50 ET this morning, the Herzfeld Caribbean Basin closed-end fund, CUBA, has had more than $150 million change hands … not bad for a mostly forgotten fund with less than $50 million in assets.
Unfortunately, a lot of that money is chasing fairy dust. As of this writing, CUBA is trading up 30 percent higher than its net asset value last night, while the actual holdings are up (by my calculations) just about 2 percent. It’s all the more dramatic because CUBA closed at a discount yesterday, making today’s pop look really exciting.
Everything That’s Wrong With CEFs
To me, this predictable rush into a closed-end fund highlights everything wrong with CEFs and how much better off investors might be if that ticker belonged to an actual ETF.
- As a closed-end fund, investors are getting a raw deal in CUBA. If CUBA were an ETF, authorized participants would be able to respond to all of this pent-up demand by creating more shares, squashing the 30 percent premium in the fund. They would do this by selling shares of CUBA and buying up shares of the underlying holdings, which would both lift those individual companies and suppress CUBA’s price. That makes everything—the stocks and the fund—trade closer to fair value. Here, there’s a huge disconnect.
- As a closed-end fund, investors actually have no idea what they’re buying. CUBA last reported holdings in June. As an actively managed fund, CUBA makes big bets. The best guess is that the largest holding in CUBA is now Copa Holdings (CPA), a NYSE listed Panamanian/Colombian airline. CPA is having a good day—it’s up 4 percent or so, but nothing like CUBA. Of course, there’s no way of knowing if CPA is even in the fund anymore. Before today it was down about 38 percent since June, so it might easily have been dumped. In an ETF, investors would have some clue what they were buying.
- Further to that point—I wonder how many investors realize that CUBA doesn’t actually invest in, you know, Cuba. With more than 50 percent of the fund invested in U.S. companies like Carnival Cruise lines and Chiquita Brands, the play on Cuba here is at best tangential. Sure, I can create a case for why Carnival might make a little more money if they can pick up and drop off in Havana, but I find runs on headlines like this, at best, confusing.
- Closed-end funds like CUBA aren’t known for being cheap. CUBA’s advisor charges a 1.45 percent annual fee, and total expenses are a whopping 2.46 percent. While there’s no direct ETF competitor trying to capture anything related to the Caribbean basin, funds like the iShares Latin America 40 (ILF | B-78) manage to get along with just 0.50 percent in total expenses, and even narrower funds like the Global X MSCI Colombia ETF (GXG | C-59) clock in at 61 basis points. That’s almost a 2 percent head wind.
If in fact the headlines bear fruit and relations with Cuba do normalize (far from a foregone conclusion), I’m quite sure ETF issuers will be all over the region with a dozen ways to play the winners in that brave new world.
Until then, chasing CUBA is a terrible way to play Cuba.
At the time this article was written, the author held no positions in the securities mentioned. You can reach Dave Nadig at [email protected] or on Twitter @DaveNadig.