The Sheltie came from the Shetland Islands off the coast of Scotland. Unlike many miniature breeds that resemble their larger counterparts, this breed was not developed by selectively breeding the Rough Collie for smaller and smaller sizes. Rather, it is the result of the intermingling of Border Collies and possibly several other herding breeds over the past several centuries.

Its exact origins are not known, but the most-often cited ancestors of the breed include the Border Collie (or its ancestors), the Yakki (also Yakkie or Yakkin) dog (a dog kept and bred by Greenland whalers), and the Icelandic sheepdog. During the 19th century, the appeal of small, fluffy dogs became clear, and there are mentions of cross-breedings with Pomeranians (which were larger then than they are today) and with the now-extinct (?) Prince Charles Spaniel or possibly a King Charles Spaniel. Some Shelties in the early 20th century had brindle coats, which could have come from a terrier or Corgi breed. Note: the "mentions" of cross-breedings with Pomeranians is largely seen as a myth by most Sheltie experts.

The year 1909 marked the initial recognition of the Sheltie by the English Kennel Club and the first Sheltie to be registered by the American Kennel Club was "Lord Scott" in 1911.