In this paper, air entrainment by a liquid jet is studied. The size of bubbles entrained by jets plunging into a liquid can be consistently decreased to the 50–100 μm range, and their number increased in a highly controllable fashion, by surrounding a mm-size jet by a hollow cap with a slightly larger inner diameter. When the right amount of air is supplied to the cap, small air bubbles detach from a steady annular cavity that forms around the jet and are entrained into the liquid. The fluid mechanical principles underlying this interesting and useful effect are investigated experimentally and theoretically in this paper. It is shown that a key aspect of the process is the jet surface roughness, which is studied quantitatively and explained in terms of the boundary layer instability inside the nozzle. The maximum bubble size is found to be nearly equal to one quarter of the wavelength of the jet surface disturbances, consistent with a breakup process of relatively large air pockets around the jet, as suggested by close-up pictures. The average bubble size downstream of the cap increases proportionally to the air to water flow ratio. Boundary integral simulations of the air pocket formation are carried out. The results are found to be useful in explaining important characteristics of the experiment such as the threshold for entrainment and cavity size.