The answer has to do with the different sizes of the water and ethanol molecules. Ethanol molecules are smaller than water molecules, so when the two liquids are mixed together the ethanol falls between the spaces left by the water. It's similar to what happens when you mix a liter of sand and a liter of rocks. You get less than two liters total volume because the sand fell between the rocks, right? Think of miscibility as 'mixability' and it's easy to remember. Fluid volumes (liquids and gases) aren't necessarily additive. Intermolecular forces (hydrogen bonding, London dispersion forces, dipole-dipole forces) also play their part in miscibility, but that's another story.