In seasonal plant communities where water availability changes dramatically both between and within seasons, understanding the mechanisms that enable plants to exploit water pulses and to survive drought periods is crucial. By measuring rates of physiological processes, we examined the trade-off between water exploitation and drought tolerance among seedlings of trees of a tropical dry forest, and identified biophysical traits most closely associated with plant water-use strategies. We also explored whether early and late secondary successional species occupy different portions of trade-off axes. As predicted, species that maintained carbon capture, hydraulic function and leaf area at higher plant water deficits during drought had low photosynthetic rates, xylem hydraulic conductivity and growth rate under non-limiting water supply. Drought tolerance was associated with more dense leaf, stem and root tissues, whereas rapid resource acquisition was associated with greater stem water storage, larger vessel diameter and larger leaf area per mass invested. We offer evidence that the water exploitation versus drought tolerance trade-off drives species differentiation in the ability of tropical dry forest trees to deal with alternating water-drought pulses. However, we detected no evidence of strong functional differentiation between early and late successional species along the proposed trade-off axes, suggesting that the environmental gradient of water availability across secondary successional habitats in the dry tropics does not filter out physiological strategies of water use among species, at least at the seedling stage.