1. An accumulating body of evidence indicates that natural plant populations harbour a large diversity of transposable elements (TEs). TEs, which are especially mobilized under genomic and/or environmental stress, provide genetic and epigenetic variation that can substantially translate into a diversity of plant phenotypes within populations. However, it remains unclear what the potential ecological effects of diversity in TEs within an otherwise genetically uniform population are in terms of phenotypic diversity's effects on coexistence and ecosystem functioning. 2. Using Arabidopsis thaliana as a proof-of-concept model, we assembled populations from individuals differing in the number and positions of ONSEN retrotransposon and tested whether the increasing diversity created by the ONSEN retrotransposon increased the phenotypic diversity of populations and enhanced their functioning under different environmental conditions. 3. We demonstrate that TE-generated variation creates differentiation in ecologically important traits connected to different axes of the plant ‘economics’ spectrum. In particular, we show that Arabidopsis populations with increasing diversity of individuals differing in the ONSEN retrotransposon had higher phenotypic and functional diversity in resource use-related traits. Such increased diversity enhanced population productivity and reduced the performance of interspecific competitors. 4. Synthesis. We conclude that TE-generated phenotypic and functional diversity can have similar effects on ecosystems as are usually documented for other biological diversity effects. The results of our experiment open up new fields of investigation, highlighting the ecological relevance of unexplored sources of phenotypic variability and hopefully inspiring functional trait ecologists and evolutionary biologists to begin exploring new questions at the intersection of their fields.