Exxon Mobil Corp (NYSE:XOM) issued a warning on Monday that diminishing oil and natural gas prices might see its second-quarter earnings reduce by approximately $1.5 billion from the first quarter, per a Reuters report.

That warning has the potential to cascade into energy-focused ETFs, several of which have enjoyed the fossil fuel rally over the past year.

Exxon’s earnings warning isn’t just corporate accounting: it’s a warning flag for the rest of the oil and gas industry. As the nation’s largest oil producer, its earnings reports tend to be a bellwether for global performance.

And that performance is looking weak as of today. According to the Reuters report, Benchmark Brent crude hit $66.71 per barrel in the second quarter, down 11% from the prior quarter, while U.S. natural gas prices decreased 9% over the same period.

Wall Street still anticipates Exxon posting adjusted income of $1.53 per share when it reports Aug. 1, but that would be a significant drop from the last quarter’s strong performance.

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Energy ETFs: Still Running Hot Or Just Running On Fumes?

The Energy Select Sector SPDR Fund (NYSE:XLE), with Exxon among its top holdings alongside Chevron Corp (NYSE:CVX) has been a favorite among investors throughout much of the year. But that’s about to change as the next earnings season begins. XLE is off about 0.2% in the past six months, with its performance tracking closely the price action in oil futures.

Other big funds to keep an eye on:

Vanguard Energy ETF (NYSE:VDE): General exposure to U.S. majors like Exxon, Chevron, and ConocoPhillips (NYSE:COP). Similar to XLE, it’s being hurt by declining upstream margins, and the stock is down 1% in the past six months.

iShares U.S. Oil & Gas Exploration & Production ETF (BATS:IEO): Provides exposure to more exploration-oriented names, which are more responsive to trends in crude prices. The stock is down 1.2% in the past six months.

Invesco Dynamic Energy Exploration & Production ETF (NYSE:PXE): This actively skewed ETF may experience volatility should earnings from mid-cap energy names follow Exxon’s decline. The fund is down almost 4% in the past six months.

Are Investors Eyeing Greener Pastures?

Investor inflows into energy ETFs have already begun to show signs of wear. As per ETF.com, XLE experienced net outflows in late June, and further downside surprises from Exxon or its peers would likely accelerate the trend.

The wider macro picture is also something to monitor. With inflation softening and the Federal Reserve looking ahead to potential cuts in rates before year’s end, demand for risky commodities and the ETFs that follow them may fade. The search for yield or stability might instead send capital into dividend-rich spaces, utilities, or even battered tech names that are rising on AI hope.

Not all are yet willing to throw in the towel on energy. According to a recent Reuters poll, some market participants believe supply discipline by OPEC+ and geopolitical risk can hold up oil prices in the second half of the year. Further, Exxon’s refining and chemical operations may mitigate some upstream weakness.

Exxon’s initial admission has cautioned the energy ETF universe. Whether this is a short-term pothole or the start of a more profound slide will probably be determined in the coming weeks, particularly as earnings season intensifies.

As things stand, investors who own energy ETFs might need to buckle up. When Exxon sneezes, the sector catches cold, and ETFs aren’t immune.

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