The power of focusing is the principle behind sector funds, mutual funds that invest in a specific industry. How powerful can sector investing be? At the end of 1999, nine of the 10 funds with the best 10-year returns were technology funds.

Such stellar returns are often the reason investors flock to particular sectors, such as technology during 1999, financials in the mid-1990s, and, more recently, to the natural resources and defense sectors in 2004. While sector investing offers great potential, it offers great risk, too. The standard deviation (the variation of a fund's monthly returns around its average monthly return) of the average technology fund is double the S&P 500's.

In this lesson, we'll discuss the variety of sector funds available, ways you might—or might not—use them in a portfolio, and what to look for when buying a sector fund.

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