Most sector funds are built on gics classifications and are cap-weighted within the sector, which means a handful of giants often dominate. Checking the top-five weight before treating a sector fund as diversified is the basic diligence step: some sector funds are effectively two-stock positions.
Sector funds are the standard instrument for sector-rotation and for hedging a single-stock position against industry-wide moves while keeping the company-specific exposure.
Example: a sector fund's top two holdings are 22% and 19% of assets. A 10% move in those two, with the other 60 constituents flat, moves the fund 4.1%, more than most holders would expect from a diversified wrapper.
Related: gics, etf, sector-rotation, market-cap-weighting, expense-ratio