David Kathman at Morningstar.com provides five tips for investing in sector funds:

Do not chase Performance
This is important for investing in any type of fund but is especially true for sector funds. Sector funds focus on very narrow areas of the market which makes them susceptible to large swings in prices and value.

Consider your entire Portfolio
Sector funds can be useful for diversifying your portfolio. If your portfolio is lacking in a certain area, adding a sector fund can help to balance things out. However adding sector funds can also make your portfolio lopsided and riskier. For example, if you already have alot of financial stocks in your portfolio adding a financial fund would not be a wise move.

Find Experienced Managers
It is best to look for a fund managed by an expert with experience. Some funds do not hire specialists. They treat their funds as a training platform for managers before they graduate to more diversified funds.

Watch the Costs
Sector funds are on average more expensive thatn diversified funds. Find out about all the expenses before signing on. It might be best to go with Exchange Traded Funds (ETFs) which even though they include brokerage costs can work out cheaper.

Don’t overdo It
Sector funds should only be a small part of your portfolio. Sector funds should take up not more than 10 percent of your portfolio.

Source: Five Tips for Smart Sector Investing