It is a diacritic that sits over a letter, usually a vowel, to indicate that two letters that would normally be a digraph are supposed to be pronounced as two syllables. In English this is considered archaic, though notably is still used by The New Yorker.
Remnants of its usage in English are still seen occasionally in the words naïve and Chloë.
Umlauts are distinct, changing the pronunciation of vowels. When used in a pair of consecutive vowels, the umlaut will appear over the first, unlike diaeresis.