Erythema toxicum neonatorum (ETN) is a benign, self-limited, asymptomatic skin condition that only occurs during the neonatal period. [1, 2, 3, 4] The eruption is characterized by small, erythematous papules, vesicles, and, occasionally, pustules. The lesions are usually surrounded by a distinctive diffuse, blotchy, erythematous halo. Individual lesions are transitory, often disappearing within hours and then appearing elsewhere on the body. See the image below.
See 13 Common-to-Rare Infant Skin Conditions, a Critical Images slideshow, to help identify rashes, birthmarks, and other skin conditions encountered in infants.
The underlying pathophysiology is uncertain. Although the initial description of toxic erythema of the newborn is attributed to the 15th century physician Bartholomaeus Metlinger, this neonatal cutaneous eruption was recognized before the time of ancient Mesopotamia.  Ancient Mesopotamian physicians believed this eruption to be "nature's method of cleansing the child of impure blood of the mother." In A Treatise on the Theory and Practice of Midwifery, the 18th century English physician William Smellie attributed the condition to "the costiveness of the child when the meconium hath not been sufficiently purged off."
The characteristic presence of eosinophils within the lesions has led some investigators to attribute this condition to an allergy. Work by Eitzman and Smith suggested that eosinophilia is part of the normal spectrum of the nonspecific inflammatory response in the neonate.  This hypothesis is supported by cases in which premature neonates have infrequent eruptions that resolve within a few weeks after birth when the neonatal immune response matures.
The etiology of erythema toxicum neonatorum remains uncertain; however, more recent hypotheses explaining the appearance of this eruption include the following:
Relative, increased, ground-substance viscosity in neonatal skin, with associated trauma leading to eosinophilic inflammation
Self-limited, acute, cutaneous, graft-versus-host reaction caused by maternal lymphocytes in the relatively immunosuppressed fetal circulation 
An innate immunologic response to commensal microbes within hair follicle epithelium
An inflammatory response mediated by various inflammatory mediators, including aquaporins, psoriasin, nitric oxide synthases
The condition affects 30-70% of newborns.  Carr and associates studied 270 newborns and found an incidence of 48%.  Keitel and Yadav studied 207 consecutive newborns and found an incidence of 62%. 
No significant differences based on race are apparent. A study by Saracli and associates documented a low incidence among black neonates; however, this may be caused by the relative difficulty of diagnosing neonates with darker skin.  Other sets of observations have noted no racial difference in incidence.
In previous studies, no significant difference in incidence is noted between the sexes. However, a study from China indicated a statistically significant predilection in boys. 
This condition is limited to the neonatal period. In a study of 270 cases, the typical newborn with erythema toxicum neonatorum was of average birth weight and born at term.  Of the newborns affected, 88% weighed 2500 g or more. In addition, 98% were born at least 35 weeks' gestation, with 85% born at least 39 weeks' gestation.
The prognosis is excellent. The lesions typically resolve within 2 weeks, and no cutaneous or systemic sequelae are generally observed. This is a benign, asymptomatic, self-limited skin condition with no known sequelae.
Parents with older children often are not concerned by the appearance of erythema toxicum neonatorum, but first-time parents should be informed in the perinatal period that an evanescent rash is likely to appear within the first 2 weeks of life. They should be reassured regarding the benign, self-limited, asymptomatic nature of this and other eruptions. 
Review the clinical features with parents before they go home. If any concerns arise about an atypical rash, they should be comfortable contacting their primary care physician to discuss the issues. Before discharge, appropriately screen neonates who have risk factors for sepsis or neonatal herpes simplex virus infection.