How to create VNodes from a string with html tags in Vue 2.5?

You can use the domProps property of the data object.

This object also allows you to bind normal HTML attributes as well as DOM properties such as innerHTML (this would replace the v-html directive)

Here is an example.

console.clear()

const content = `
  <line x1="6" y1="3" x2="6" y2="15"></line>
  <circle cx="18" cy="6" r="3"></circle>
  <circle cx="6" cy="18" r="3"></circle>
  <path d="M18 9a9 9 0 0 1-9 9"></path>
`

new Vue({
  el: "#app",
  render(h){
    return h("svg", {domProps:{innerHTML: content}})
  }
})

<script src="https://cdnjs.cloudflare.com/ajax/libs/vue/2.5.16/vue.min.js"></script>
<div id="app"></div>

In your case, you would just set innerHTML to the content from feathers.

Also, as a side note, if you don't have a template, generally you just use a straight javascript file. You don't need a single file component. So your component would be

FeatherIcon.js

const feather = require("feather-icons");

export default {
  props: {
    type: {
      required: true,
      type: String
    }
  },
  render(createElement) {
    return createElement(
      "svg",
      {
        attrs: feather.icons[this.type].attrs,
        domProps: {
          innerHTML: feather.icons[this.type].content
        }
      });
  }
};

Finally, you mentioned wanted to make this a functional component, in which case, you could just do something like this:

const FeatherIcon = {
  functional: true,
  props: {
    type: {
      required: true,
      type: String
    }
  },
  render(h, context){
    const {contents, attrs} = feather.icons[context.props.type]
    return h("svg", {attrs, domProps: {innerHTML: contents}})
  }
};

Here is an example of that working.

console.clear()

const FeatherIcon = {
  functional: true,
  props: {
    type: {
      required: true,
      type: String
    }
  },
  render(h, context){
    const {contents, attrs} = feather.icons[context.props.type]
    return h("svg", {attrs, domProps: {innerHTML: contents}})
  }
};

new Vue({
  el: "#app",
  components: {
    FeatherIcon
  }
})

<script src="https://cdnjs.cloudflare.com/ajax/libs/vue/2.5.16/vue.min.js"></script>
<script src="https://unpkg.com/feather-icons"></script>
<div id="app">
  <feather-icon type="eye"></feather-icon>
  <feather-icon type="activity"></feather-icon>
  <feather-icon type="award"></feather-icon>
</div>