ENLARGE

The real-estate sector fell 7.9% from the close of its first day of trading on Sept. 19 through Friday. Above, a Public Storage facility in Weymouth, Mass. PHOTO: BRIAN SNYDER/REUTERS

The S&P 500’s newest sector is also its worst-performing.

Real estate has lagged behind the broader market since splitting off from financials and becoming its own stock grouping in September. The sector—which includes shares of real-estate investment trusts and real-estate management companies—fell 7.9% from the close of its first day of trading on Sept. 19 through Friday, making it the worst-performing sector out of 11 over that period.

The S&P 500 climbed 2.5% and financial shares gained 17% since the sector split.

It’s a case of bad timing for an investment that has been one of the top performers for more than a decade. S&P Dow Jones Indices spun off the new sector when the conditions that made REITs’ steady payouts attractive for so long—ultralow interest rates—were under threat.

Because REITs have special tax status, they are required to give most of their taxable income to shareholders, making them attractive to income-seeking investors. But the Federal Reserve has signaled it wants to raise interest rates before the end of the year. And many investors expect the policies of President-elect Donald Trump to stoke growth and inflation, which could make dividend-paying stocks less attractive if investors can get better returns elsewhere. Real-estate stocks lost 2.8% from their close on Election Day through Friday.

“I don’t see any screaming buys within real estate,” said Alan Gayle,director of asset allocation at RidgeWorth Investments, which has $40.1 billion in assets under management. “The market is sort of giving up on it, so we will kindly back away.”

REITs had produced an average annual return of 12% a year from 2000 through the first half of 2016, according to J.P. Morgan Asset Management, which measured the performance of the FTSE NAREIT Equity REITs Index. That made them the best performers of 10 asset classes J.P. Morgan looked at over that period.

With the formation of the S&P 500’s 11th sector, investors who want to scoop up real-estate stocks without adding exposure to financial firms like banks and insurance companies can make purer bets through sector-tracking funds.

ENLARGE

Through the first nine months of the year, investors put a net $10.4 billion into passively managed real-estate funds, according to data from Morningstar Inc. In October, investors yanked out about $1.8 billion from those funds.

Equity Residential, a REIT, fell 26% for the year through Friday, self-storage provider Extra Space Storage Inc. lost 20% and Public Storage declined 15%. Data-storage companies Iron Mountain Inc.and Digital Realty Trust Inc. have fared better, gaining 25% and 18%, respectively.

Some investors still see reasons to invest in the sector.

“It’s not the end of the world for REITs,” said Kate Warne, an investment strategist at Edward Jones, which has $950 billion in assets under management and a neutral allocation for real estate.

While rising rates increase borrowing costs for real-estate companies, Ms. Warne believes REITs are better positioned to provide returns in a higher-rate environment than utilities, another dividend-paying sector, because they could increase cash flows through raising rents.

Even with the prospect of a rate increase in the U.S., interest rates are still relatively low in developed countries. The Fed has left its federal-funds rate unchanged since December 2015 in a range between 0.25% and 0.5%, and some rates are below zero in Japan and Europe.

But RidgeWorth’s Mr. Gayle—who has an underweight allocation for real-estate shares—thinks the time has passed for real estate.

“We look at the chart and we see other investors don’t believe in it,” Mr. Gayle said.

Write to Akane Otani at akane.otani@wsj.com