This article is from the rec.audio.* FAQ, by with numerous contributions by Bob Neidorff others.
These tweeters are built almost exactly the same as other
tweeters. They look and act almost exactly the same, too.
The only difference is that they have a small, controlled
amount of a special fluid inserted into the gap between the
magnet and the voice coil.
One big effect of adding this fluid to a tweeter (or to any
speaker) is that it makes the voice coil capable of dissipating
more heat. This means that the speaker can have a lighter voice
coil, for better performance, or a higher power rating for the
same voice coil. The other big effect of this fluid is to add
mechanical damping. The frequency response and transient
response of the driver will change, possibly for the better.
In addition, this fluid may help center the voice coil, may
lubricate the voice coil, and may help keep dirt out of the gap.
This fluid will not increase the magnetic field, concentrate the
magnetic field or otherwise change the magnetic circuit. Nor
will it cushion impact if the voice coil bottoms.
The fluid used for this purpose is often called "ferrofluid".
It consists of sub-microscopic particles of magnetic material
suspended in special oil. This fluid stays in the gap because
of the strong magnetic pull of the magnet. There is some debate
over whether these fluids can dry out with time. Manufacturers
claim that the oil used is non-volatile.
It is possible to use ferrofluids in mid-range drivers and
woofers. However, as tweeters tend to have the most fragile
voice coils, tweeters have the most to gain from ferrofluid.
There are various different fluids on the market, some of which
have characteristics tailored to tweeters, some to woofers, etc.
It is very risky to blindly add fluid to a driver. It may not
be compatible with the adhesives used in the driver, may not be
practical with the particular driver layout, and is impossible
to remove. Permanent driver damage is possible.