You may not know this, but I'm a Cuban-American.

I've never stepped foot on the island. My parents fled the year before I was born, after their land, dreams, and freedom were taken away.

I wasn't there, so I don't have the same rage against the island's communist regime as my elder family members who suffered, were imprisoned, and know all too many people who perished for their dissenting views.

However, I always keep my eye on Cuba. It's in my blood. Politically, I may be as middle-of-the-road as they come, but the experiences of my parents and grandparents have led me to a passionate embrace of capitalism and the free markets. It's probably why I'm here right now.

The latest news that the island is loosening its tight economic grip is compelling. In a budgetary crunch, Cuba plans to fire 500,000 state-employed individuals. It's roughly a tenth of the country's working population, and the move will require loosening restrictions of the island's tiny private sector.

Free markets? Cuba? The end of communism as we know it? Let's not get ahead of ourselves here.

History repeats and this fund retreats
Whenever whiffs of "Cuba libre" fill the air -- whether it's reports of an ailing Fidel Castro or embargo-easing compromises -- shares of Herzfeld Caribbean Basin Fund (Nasdaq: CUBA), a closed-end fund that aims to cash in on a free Cuba, go bonkers.

It hasn't happened yet. Shares of the fund have climbed 14% since bottoming out this summer, but the net asset value has also kept pace with the gains. Like most closed-end equity funds, Herzfeld Caribbean Basin trades at a discount to the value of its net holdings. The fund closed at $6.43 a share yesterday, a discount of nearly 6% to its NAV of $6.81 per share.

Watch this space.

If the news in Cuba continues to favor a shift toward freer markets, opening the door to the island as a legal trading partner if political restrictions are also eased, investors will start punching in the C-U-B-A ticker symbol into their brokerage buy boxes -- only to get burned.

Yes, singed to a crisp.

Three years ago, when Castro disappeared from public view and handed control to his brother, shares of the fund soared past the $15 mark, even though the value of its underlying assets clocked in at a mere $8.44 a share.

Dan Caplinger warned you about chasing the fund at the time. So did I.

This time, I'm going to tip you off about the possibility of another run-up before it happens. The ride up will be swift if Cuba takes a capitalistic turn. However, I'm also warning you to stay away -- or duck out quickly -- because the fund has a history of crashing down even faster.

The Cuban misled crisis
Despite its name and ticker symbol, the fund is really largely a collection of stateside companies -- primarily Florida-based ones -- that would seem to benefit from Cuba as a trading partner.

Let's go over some of the stocks the fund owns.

  • Seaboard (NYSE: SEB) is the fund's largest holding. As a leading provider of containerized shipping services, it's a logical beneficiary if there will be goods shipped between Cuba and Florida.
  • Watsco (NYSE: WSO) is the fund's second-largest holding. The South Florida company is the largest distributor of air-conditioning, heating, and refrigeration equipment. If you've seen the sorry state of the island's residential neighborhoods, you will appreciate the potential of cooling in a trade-empowered Cuba.
  • Carnival (NYSE: CCL) and Royal Caribbean (NYSE: RCL) are a pair of Miami-based cruise-line operators. Business will naturally spike, especially in South Florida, if and when the cruise ships are able to include Cuba on their itineraries.
  • America Movil (NYSE: AMX) is the Mexican wireless giant with a hearty presence throughout the Caribbean and Latin America.
  • Lennar (NYSE: LEN) is the Miami-based homebuilder. This is clearly more of a long-term play, since Herzfeld's vision of Lennar becoming a major homebuilder in Cuba is going to take several years -- if not a decade or two -- before logically playing itself out.

Save for a handful of Cuban bonds in default, investors can easily duplicate the fund's portfolio. Right now, this may not matter, but it's something to keep in mind the moment the fund begins trading at a premium to its NAV. Since that has been historically unsustainable, the better play at that time will be to buy into the individual stocks that make up its largest holdings.

It's the smart way to play Cuba -- when there's actually a smart Cuba to be played.

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Longtime Fool contributor Rick Munarriz feels that emerging markets still offers great opportunities for growth investors, as long as you're buying into the right ones. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. He does not own shares in any of the companies in this story. The Fool has a disclosure policy.