Vob files are just containers for the video. The video is already encoded with the mpeg2 codec, so there is no conversion necessary.
If you want to play the video on a stand alone dvd player, it will have to be in dvd format, which means it has to have the necessary vob, ifo and bup files in a Video_TS folder.
This particular program you are using is both an mpeg2 editor and an authoring program. You can do your editing in it and output in dvd-video format, ready to burn to disk.
And to answer your last question, yes, leaving the video in .vob files as mpeg2 is the best course for maintaining quality of the video.