An ethereal creature cannot be detected by others, without true seeing or the ability to see invisibility. The term originates from the D&D concept of existing on the ethereal plane, rather than the material, but in Neverwinter Nights, this effect is essentially an improved form of invisibility that includes inaudibility, making it impossible to target the creature directly (aside from a bug in the game that makes it possible to target an ethereal creature that is also under the effects of improved invisibility). Like invisibility, etherealness is lost if the subject, or a lingering spell cast by the subject, performs any hostile act. (This does not include summoning a creature nor hostile actions taken by a summoned creature.)
While ethereal creatures cannot be directly targeted, they can be affected by something with an area of effect. This includes some abilities that affect an area but target individual creatures with projectiles, such as hail of arrows.
The usual source of etherealness is the spell greater sanctuary (which had a pre-release name of "etherealness").