Cuba is open for business!
Well, at least it soon will be.
The announcement this week of a relaxation of some regulations on trade with Cuba sparked a lot of excitement.
U.S. businesses and investors are already targeting the opportunity provided by a market of 11 million Cubans and an island that has -- economically at least -- never really left the 1950s.
Whether you agree with the change in policy or not, there’s a big opportunity here. And the smart money is already moving on it.
The Real Opportunity in Cuba
Cuba is overdue for investment.
Yes, it has normal relations and trade with 170 other countries.
There are direct flights into Havana’s Jose Marti International airport from about 20 countries every day.
But the big news is the U.S. would be easing restrictions on trade with Cuba and that’s enough to get investors excited about Cuba.
And when investors get excited about Cuba, they pile money into the Herzfeld Caribbean Basin Fund (CUBA).
This fund has been marketed as the way for investors to play Cuba for years.
The thing is though, it’s top holdings only have very loose ties to Cuba.
Here are it’s top four holdings and the percentage they make of CUBA:
Copa Holdings SA (CPA) - 8% - is the holding company of Copa Airlines, a south and central American air carrier based in Panama with a big presence in Havana.
MasTec (MTZ) - 6% - is an infrastructure builder that, according to it’s official profile, operates “primarily in the United States.” It builds everything Cuba would need like telecom networks, electric grids, oil and gas, and everything a first world society needs.
Coca-Cola FEMSA S.A.B de C.V (KOF) - 6% - is the central and South American bottling company for Coca-Cola. It has distribution networks in Mexico, Guatemala, Nicaragua, Costa Rica, Panama, Colombia, Brazil, and Argentina carries a market value of more than $17 billion.
Royal Caribbean Cruises (RCL) - 6% - operates 41 cruise ships.
Together these four holdings make up 26% of the funds holdings. The rest of the holdings are similar too. There’s a couple more cruise lines, a central American bank, and more of the same.
The point is none of the holdings are really a direct play on Cuba at all.
In fact, almost none of the holdings in the fund will benefit tremendously from opening up Cuba.
I mean, a huge Coca-Cola bottling company isn’t going to watch its sales soar just from Cuba opening up.
But the market rarely cares about reality in the short-term. It loves stories. And CUBA is a great story that’s already paying off big for investors.
To be clear though, I’m not recommending CUBA. But I am recommending a lot of investments like CUBA because it’s a special type of investment that can and often does deliver more gains with less risk than any stock, mutual fund, or ETF (an investment I have personally recommended in my Advanced Wealth Letter).
4X Better Than Stocks
You see, CUBA is a special type of fund called a Closed End Fund (CEF).
It’s basically like a mutual fund in that it owns a basket of stocks, bonds, and other assets depending on the fund.
The main difference is the price of it is set by supply and demand rather than the value of the assets.
For example, a mutual fund that can be bought or redeemed $12.35 will have a Net Asset Value (NAV) of all its holdings of $12.35 per share.
A CEF is traded like a stock on the open market. The buying and selling demand sets the price. And the price is only related to the actual NAV of the CEF.
As a result, when demand is high, a CEF, it will trade at a premium to the NAV of the fund. When demand is low, it will trade a discount to NAV.
This structure gives CEF’s a tremendous advantage investors just can’t get anywhere else.
That advantage is realized when you buy CEFs at a discount to their NAV.
They can trade with discounts as steep as 10% to 15% and it’s the functional equivalent of buying the funds holdings for 85 or 90 cents on the dollar.
Let’s use CUBA as an example.
The chart below is CUBA’s share price on the market (green line) compared to it’s NAV (orange line) over the last five days.
As you can see, CUBA shares were trading at a discount of about 12% to its NAV in the days leading up to the announcement.
After the announcement, demand for CUBA soared. The demand closed the discount and pushed the shares into a premium over NAV. And the premium ended at 9% above NAV.
In all that’s a 21% swing from discount to premium that went straight into investors’ pockets.
More importantly, it’s a great example of exactly why CEFs -- when purchased at a deep discount to NAV -- can make very advantageous investments.
After all, CUBA’s holdings aren’t anything special. It’s largest holdings all trade on the major U.S. exchanges and would only be impacted slightly by opening up of the Cuban market.
So it’s NAV did increase about 7% since the announcement. But that was due largely to the market-wide rebound than the Cuba policy change.
But with the CEF structure, CUBA was able to beat the stocks it was holding by about four times over (28% instead of 7%).
That’s a huge amount of additional gains that CEFs offer investors.
If you want more gains with less risk, take a look at CEFs. There’s a CUBA-like move more often than most investor realize. CEFs are the way to get in on it all.