We all know that Fidel Castro is on his deathbed, but the Cuban leader isn't the only time bomb ticking. Another one comes in the form of the Herzfeld Caribbean Basin Fund (NASDAQ:CUBA) closed-end fund. As exchange-traded mutual funds, these vehicles will often carry slight premiums or discounts to the actual value of their holdings.

However, Herzfeld's premium is beyond ridiculous. New shareowners are willing to pay more than $15 today for a fund with a net asset value (NAV) of $8.44. Would you pay me $1.80 for a dollar bill? That's exactly what's happening here, and apparently, there's a sucker born every uptick.

Dan Caplinger warned you about this two weeks ago, but since Mr. Market has chosen to ignore his sound advice, I'll have to repeat it a little more loudly.

Let me tell you everything you need to know about this unsustainable premium.

1. The fund was founded 13 years ago, on the premise that the U.S. will ease its embargo with Cuba and create lucrative trade opportunities. That hasn't happened. Yes, the fund's NAV has doubled in that time, but the S&P 500 has actually tripled in that same span.

2. In a wickedly ironic twist, some of the fund's own investments are in regional closed-end funds -- such as Mexico Fund (NYSE:MXF) and, until recently, Latin American Equity (NYSE:LAQ) -- that can be bought at discounts to their respective NAVs.

3. The fund doesn't own beachfront property on the shores of Varadero or hopping Havana supper clubs. It buys stocks that you can freely find on the open exchanges -- without having to pay an 80% markup. In fact, 57% of the stocks are U.S. companies. Some of its largest holdings include Carnival (NYSE:CCL) and Garmin (NASDAQ:GRMN). If you think that Garmin is pricey at 25 times trailing earnings, how can you justify a P/E of 45 by buying it at an 80% premium?

4. The post-Castro impact is already baked into some of the fund's holdings. Railroad operator Florida East Coast Industries (NYSE:FLA), its largest holding, has already shot up by a third since Castro fell ill this past summer. Why pay more? More than a fifth of the fund is in this single investment. Go ahead and buy it yourself at face value.

5. The fund has an insane annual expense ratio of 3.4%. The top-shelf international funds that Shannon Zimmerman recommends to Motley Fool Champion Funds subscribers have expenses that clock in at a third of that rate.

6. Herzfeld can't help the high expenses. The fund has just $14 million in assets. However, the company also pays brokerage commissions of $0.06 a share on its transactions to an advisor affiliate. In its defense, Herzfeld has kept its annual turnover rate between 3% and 40% over the past few years. That is reasonable, though it should be noted that the turnover rate has gone up in each of the past three fiscal years.

7. Your fellow Fools think you're nuts for going gaga over the fund. Over at Motley Fool CAPS, 82% of those with an opinion on Herzfeld Caribbean Basin believe it will underperform the market in the future. Believe them. If you limit your sample on the stock-rating service to its best players, 93% think the market will shine more kindly on the S&P 500.

The right way to buy closed-end funds
Even though closed-end funds seem to be losing steam against their kissing cousins, index-driven exchange-traded funds, I still love the concept of actively managed funds that trade above and below their actual liquidation values.

Closed-end funds have an important advantage over the more conventional open-end mutual funds. Because the number of outstanding shares remains fixed -- something that doesn't happen in the wide-open world of additions and withdrawals with mainstream funds -- a fund manager is able to concentrate on running the portfolio instead of managing for influxes of capital or waves of redemptions.

So how great is it to find a quality fund that is trading at a discount? I have written about this before. Sure, some funds will perpetually trade at discounts. But that's OK. In fact, so did Herzfeld Caribbean Basin.

At the end of fiscal 2005, the stock was perched at $6.30, despite representing $7.33 a share in net assets. In other words, the fund traded at a 14% discount. A year later, the discount had narrowed to 6%. If you'd bought Herzfeld Caribbean Basin at a discount, you would be sitting pretty today. How do you think investors who buy at a premium today will feel a year from now?

You know the answer. Folks who buy into Herzfeld Caribbean Basin hoping for a day when Cuba will rid itself of a Red government may still find red popping up in their brokerage statements.

Garmin is a Stock Advisor recommendation.

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Longtime Fool contributor Rick Munarriz has invested in closed-end funds in the past, though he does not own any at the moment. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.