I don't know the official way Etsy chooses a featured seller, but I do know that being a featured seller = many, many sales, usually.
The sellers who have been featured have lots of product and probably are considered successful in the amount of sales. I remember reading, too, that since a shop would likely get a ton of orders from having been a featured seller, they would have to be able to keep up with those orders as they are being placed, in that it's usually something that can be produced quickly or already in stock.