Ethiopia has experienced more than 10 major drought episodes since the 1970s. Evidence has shown that climate change exacerbates the situation and presents a daunting challenge to predominantly rain-fed agricultural livelihoods. The aim of this study was to analyze the extent and sources of smallholder famers’ livelihood vulnerability to climate change/variability in the Upper Blue Nile basin. We conducted a household survey (n = 391) across three distinct agroecological communities and a formative composite index of livelihood vulnerability (LVI) was constructed. The Mann–Kendall test and the standard precipitation index (SPI) were employed to analyze trends of rainfall, temperature, and drought prevalence for the period from 1982 to 2016. The communities across watersheds showed a relative difference in the overall livelihood vulnerability index. Aba Gerima (midland) was found to be more vulnerable, with a score of 0.37, while Guder (highland) had a relatively lower LVI with a 0.34 index score. Given similar exposure to climate variability and drought episodes, communities’ livelihood vulnerability was mainly attributed to their low adaptive capacity and higher sensitivity indicators. Adaptive capacity was largely constrained by a lack of participation in community-based organizations and a lack of income diversification. This study will have practical implications for policy development in heterogeneous agroecological regions for sustainable livelihood development and climate change adaptation programs.