From my understanding, “sont où ?” would mean “where are they?” so why is the “Y” at the start of the sentence needed? What does it convey?
"Y" stands for "Ils" in familiar spoken language, it should be "Ils sont où ?"
But the correct form is:
Où sont-ils ?
The formal way to ask “Where are they?” in French is “Où sont-ils ?”. In informal spoken French, questions are often expressed by using the same word order as in an affirmative sentence (subject-verb-complements) and indicating that the sentence is a question solely through a rising tone at the end or, with a question word, just by the presence of the question word: “Ils sont où ?”. This is generally mentioned in grammar books.
In very informal spoken French, subject pronouns can be weakened. All the subject pronouns consist of a single syllable with a consonant and a vowel, and the weakened form is usually made by dropping the second sound. This is especially common with children, but it isn't limited to children. Many grammar books don't mention this and books won't use those forms unless they're conveying very informal speech on purpose.
je → j' even when not followed by a vowel. When the verb begins with a [s] sound, [ʒs] turns into [ʃ].
J'veux pas ! (Je ne veux pas. — “I dun wanna!”)
Chais pas. (Je ne sais pas. — “I dunno.”)
tu → t' (but rarely before a consonant)
T'es pas cap ! (Tu n'est pas capable. — lit. “you aren't able”, means “you don't dare”)
il(s) → y before a consonant
ils → y-z- before a vowel (the liaison stays)
elle(s) → è or y, but this is rare
il/elle → l' sometimes before a vowel
ça → a, also rare
L'est où ? (Où est-il/elle ? — “Where is he/she?” — rare)
Y sont où ? (Où sont-ils ? — “Where are they?”)
Y-z-ont rien vu. (Ils n'ont rien vu. — “They din't see nuffin'.”)
A veut pas marcher. (Ça ne veut pas marcher = Ça ne marche pas — “It's not workin'”)
In “il y a” (and other tenses: il y avait, etc.), the word il disappears completely in this informal construction, and the y is pronounced as a semi-vowel [j]: “y'a” (pronounced as a single syllable [ja]), y'avait, etc.
nous doesn't have a weakened form, but in informal speech it's replaced by on which is a single sound so can't be weakened any further.
On a gagné. (Nous avons gagné. — “We won.”)
vous → z' — unlike the other weakened forms I listed, which are fairly modern, this one is rather old-fashioned.
There are many variations on how to phrase questions in informal spoken French. The question word can stay at the beginning: “Où ils sont ?”, “Où y sont ?”. The medium-formality form “Où est-ce qu'ils sont ?” is rarely used in full, but can be shortened to the very informal “Où qu'y sont ?”. This form can in turn be reinforced to put the emphasis on the question: “Où qu'c'est qu'y sont ?”, “Où qu'est-c'qu'y sont ?”, “Où qu'est qu'c'est qu'y sont ?”…
Although it is hard to be sure without any context, "Y sont où?" is probably how the autor conveys a very informal spoken version of "Où sont-ils ?". It is very usual to lose the interrogative inversion in spoken language, turning it in "Ils sont où ?". If you tell this fast enough this is soon heard as "Y sont où ?".
"Sont où" on the other hand is hardly used alone although some might argue that speaking even faster you could indeed not hear the "y".
Note that the direction of the diacritic on the "u" in your question is also wrong, actually I’m quite sure ú is never used in French.
I'm not native and I'm not familiar with this informal use of
Y. Grammatically, neither sont où nor y sont où are correct.
With increasing level of formality the following are correct:
Ils sont où ? Où ils sont ?
Où est-ce qu'ils sont ?
Où sont-ils ?
Googling a little, I encountered y sont où, les/ces/...? in various forums but I did not find any appearance of this structure in a grammar book or a grammar-oriented web-page.
On the contrary the affirmative phrase:
Ils y sont.
meaning they are there is correct.
Sont-ils à l'école/au théâtre ? Oui, ils y sont.