Investment is a very personal thing and has much to do with your knowledge, experience and risk tolerance.
For most of investors, a stock market index fund like SPY, VOO or a total stock market index fund like VTI is suitable for them since it is highly diversified with low risk. That is why you will find them in most of 401(k) plans.
The sector funds invest in a particular business like XLF, XLU, etc. and they are not as diversified as index funds and the risk profile is high. But the return is higher than the index funds as well. Remember, higher risk does not just translate to higher returns, but also could be higher losses. If you have the experience and higher risk tolerance, the sector funds do generally provide better returns.
Selecting multiple sector funds for diversification is a way to lower your risk, but if you select all of them, your selection basically become an index fund. Bottomline, every investor needs to assess his or her risk tolerance before choosing an investment.
If an investor is more experienced and can handled the risk, he or she can invest in individual stocks which are the least diversified and have the highest risk among all the previous two investment products.
