Introduction

Ethereal Items are found only in the Expansion. "Ethereal" is not a modifier, it's a type of item flag, similar to Superior or Socketed, that can occur on all types of items. Ethereal can occur on normal items, but also magical, Rare, Unique, (but not Set), any type of item in the game that has durability.

Never Ethereal: Rings, amulets, bows, crossbows, or on the always indestructible Phase Blades (Elite Crystal Swords), or any Set Items. Unique items that are Indestructible as a special property will not spawn Ethereal either. Sets being never-ethereal is assumed to be a bug.

Ethereal occurs on about 5% of all weapons and armor. It is both good and bad.

The good is that it raises a weapon's damage 50%, and an armor's defense 50%.
The bad is that it lowers their durability by 45%, and and the real kicker, it makes them un-repairable.

So an Ethereal weapon will potentially have the biggest damage of any weapon in the game, but it wouldn't last long. Armor can be usable indefinitely with Ethereal on it, depending on how often your character gets hit, and the added Defense can help, but very few characters select their armor based on it adding higher defense, and the ones that do are the ones who need higher defense, I.E. they are getting hit a lot.

Ethereal items are always found with full durability, unlike normal, magical, and rare items. Of course this full durability is about half the normal, but instead of finding say 23/50 Field Plate, the ethereal will have 27/27 when found.

Ethereal items with charges do not spawn with full charges, and the charges can not be repaired or recharged in any way.

Ethereal items calculate the 50% defense or damage increase on the base item, and that is then modified by any mods on the item. This makes for much larger improvements in defense/damage.

Ethereal Appearance

Ethereal items on the ground have a dark gray name, just like socketed items. You can't tell a socketed armor, helm, weapon, or shield from an ethereal from the name tag. Obviously if the gray-text item is boots, belt, or gloves, it's going to be Ethereal, since those items can't be socketed. Bliz has considered changing the colors, such as making Ethereal slightly lighter grey, but this hasn't happened yet. Perhaps in v1.10. You can't see any indication that a magical, set, rare, or unique item in Ethereal from the name when on the ground.

In your inventory Ethereal items are transparent. They have the same colors from affixes as other items, but they'll always be somewhat see-through. You can see one here.