When we say "Shetland yarn" we are talking about a type of yarn that originated on the Shetland islands. This cluster of islands off the northeast coast of Scotland are described by Wikipedia as "subarctic." Other words commonly used to describe Shetland are "rugged," "wind-swept," and "bleak."
If you live in Shetland, you need some tough outerwear. You want a sweater so thick and dense that neither wind nor rain (nor rain driven by high winds) can penetrate it. You want that sweater to be durable, because it's going to be a hard-worn item of work clothing. And since it will be but one of many layers of clothing, you don't particularly care if it's "next to the skin soft." It's more important that it be sturdy.
Enter Shetland wool yarn, which in its original form was spun from the wool of the native Shetland sheep. These sturdy little creatures give a surprisingly fine and graceful fiber. One of the most common forms of Shetland yarn is a loosely-spun two-ply yarn, like Jamieson's Shetland Spindrift.
Modern knitters seem obsessed with the pursuit of "soft." But scratchy yarns have their place, too. Shetland yarn's scratchiness is also the quality which allows the fibers to interlock, creating a garment that won't unravel when its owner wears or snags a hole in it.
This is the same quality which allows for steeking, the (terrifying to the uninitiated) technique of turning a tube of knitting into a cardigan by snipping up the center with a pair of scissors. You don't necessarily need to tack down the two sides if you are using Shetland yarn. It will hold itself together just fine.
When you knit a fine gauge Shetland yarn into a length of stockinette, all of the plies lock together to form a cohesive single swath of fabric. The loose fibers, also called the halo, are what is responsible for that scratchy feel. But they are also what helps the whole thing hold itself together. And this creates a dense fabric which repels wind and rain like an all-natural version of Gore-Tex.
Perhaps in reaction to the somewhat dour nature of the yarn itself (much less the dour nature of life on the Shetland islands), the Shetland knitting tradition gave birth to a crazy panoply of colorwork conventions.
Shetland yarn comes in several different shades from the sheep themselves, of course. But it is also dyed in a myriad of different colors, from sublime to eye-popping. And these colors are used together in a shifting palette of lights and darks to give us the wonderful colorwork traditions found in the patterns of Alice Starmore and others.
The most difficult thing about Shetland yarn is resisting the urge to buy one of each color!