The word "featured" can mean several different things on Etsy. You can be featured on the front page in either a Treasury or in an interview below the front page Treasury as a Featured Seller. You can also feature items in your shop, and that is what I'm going to talk about today. You can choose three items which will be "featured" in your shop, which will show up in a row between your shop announcement and your listings. These items will still appear in your listings, they will just be emphasized at the top, also.
When you log in to Your Etsy, the opening page is your Currently for Sale list. Notice to the right hand side of each listing is the outline of a star. Decide which five pictures are your best, or which items are for sale, or which you really want to make sure anyone coming into your shop will see (only three will be featured, but you want some backups in case one or two sell). Click the star of these items and the star will become greenish/yellow.
Now, on the left hand side underneath Currently for Sale is Featured Listings. Click here.
You can decide which listings you want to be featured by using the up and down buttons/arrows to the right of each listing. The top three will be featured, the rest will be back ups in the order they are in top to bottom. You may have as many back ups as you want, but I would have at least two. You never know when you'll get lucky and make a bunch of sales at once!
If you ask for advice in the forums and haven't filled in your Featured Listing section, people will probably tell you to do this. It's just a nice way to show buyers your nicest things at once.