Objective This study explored the association of BMI and insulin sensitivity with cognitive performance in type 2 diabetes. Methods A cross‐sectional analysis of data from the baseline assessment of the Glycemia Reduction Approaches in Diabetes: a Comparative Effectiveness Study (GRADE) was conducted. BMI was used as a surrogate of adiposity and the Matsuda index as the measure of insulin sensitivity. Cognitive tests included the Spanish English Verbal Learning Test, the Digit Symbol Substitution Test, and the letter and animal fluency tests. Results Cognitive assessments were completed by 5018 (99.4%) of 5047 participants aged 56.7 ± 10.0 years, of whom 36.4% were female. Higher BMI and lower insulin sensitivity were related to better performance on memory and verbal fluency tests. In models including BMI and insulin sensitivity simultaneously, only higher BMI was related to better cognitive performance. Conclusions In this study, higher BMI and lower insulin sensitivity in type 2 diabetes were cross‐sectionally associated with better cognitive performance. However, only higher BMI was related to cognitive performance when both BMI and insulin sensitivity were considered simultaneously. The causality and mechanisms for this association need to be determined in future studies.