Hydrological niche segregation (HNS), which refers to differences in root water uptake depth and physiological traits among coexisting species, remains poorly understood especially with respect to moisture changes and diverse water use strategies. This is particularly the case in regions with a seasonally dry climate where plants must constantly adapt to water stress. Over a 2-year period, we analyzed the isotopic compositions of xylem and soil water (δ2H, δ18O) and foliar δ13C to identify the water sources and intrinsic water use efficiency (WUEi), respectively, of four coexisting plant species. These species include Populus simonii (a type of tree), Caragana korshinskii and Salix psammophila (both types of shrub), and Artemisia ordosica (a semi-shrub). This study was conducted in a semi-arid ecosystem in China’s Loess Plateau (CLP). To quantify HNS defined by δ2H, δ18O and δ13C, we used a model called nicheROVER. Our results show that these four co-existing species had distinct position on a hydrological niche axis defined by their water sources and WUEi. P. simonii depended on deep soil water and demonstrated a high WUEi. Both shrubs, C. korshinskii and S. psammophila, utilized deep and intermediate soil water, respectively, and had comparable WUEi. The semi-shrub A. ordosica relied on shallow soil water and showed a low WUEi. These differences in water sources and WUEi led to HNS between A. ordosica and the other three species during the wet year. However, in a dry year, HNS reduced as the shrubs and semi-shrub increased their use of deep soil water and improved WUEi. Overall, these results demonstrate that HNS is a dynamic process that varies on at least an annual basis. It expands and contracts as plants regulate their water uptake and loss in response to changing soil moisture conditions.