The effect of spatial heterogeneity on species coexistence relies on the degree of niche heterogeneity in the habitat and the ability of species to exploit the available niche opportunities. We studied species coexistence in a perennial grassland, and tested whether small-scale disturbances create environmental heterogeneity that affects coexistence and whether the functional diversity of species in the species pool affects the ability of community composition to reflect heterogeneity through species sorting. We manipulated the spatio-temporal heterogeneity of disturbance and the functional diversity of species added as seed and measured their impact on the spatial turnover of species composition. Disturbance increased environmental heterogeneity and spatial turnover, and the effect of heterogeneity on turnover was greatest in the presence of a functionally diverse species pool, showing the importance of trait variation among species for exploiting environmental heterogeneity, and suggesting that coexistence occurred due to species sorting among heterogeneous niches.