How can I get letter spacing?

With the microtype package and pdfTeX, you just need to enclose the text which you want to emphasize in a \textls command. You can adjust the amount of letterspacing (Sperrsatz) globally by adding letterspace=125 to the package options or, alternatively, locally by providing it as an optional argument to the \textls command (in multiples of 1/1000 em).

\documentclass{article}

\usepackage{yfonts}
\usepackage[letterspace=125]{microtype}

\begin{document}
\frakfamily
\textls{B\"ackerstra\ss e}
\textls[50]{B\"ackerstra\ss e}
\end{document}

If you are not interested in the other features of microtype such as margin kerning, you can instead load the letterspace package with the same option.

This page from the UniFraktur project goes into detail about letterspacing and shows what to do for XeLaTeX.

You can use the soulutf8 package and its \sodef command to define a new command to get the desired letter spacing; to mantain a ligature you can use \mbox inside the argument of the newly defined command:

\documentclass{article} 
\usepackage[T1]{fontenc}
\usepackage[utf8]{inputenc}
\usepackage{soulutf8}

\sodef\Sp{}{.125em}{1em plus1em}{2em plus.1em minus.1em}


\begin{document}
\Sp{Bäcker\mbox{ßt}raße}
\end{document}