With Smart Objects, Photoshop allows you to bring in vector images and retain their vector data. It also allows you to bring in multiple layered images and treat them as one object.
Its like Photoshop is allowing you to import another Photoshop document, and is keeping all the layer info from that imported docuement.
Except, instead of referencing an external image, this Smart Object is embedded within your main Photoshop document.
Now, if you double click on the Smart Object, it opens this object like a separate Photoshop file, allowing you to edit all the layers within. When you save it, the changes appear like magic in the main file. You can close the Smart Object after saving and it open it again just by double clicking on the Smart Object layer in your main Photoshop document.
Now, you can blur text or vector images, or apply any number of other effects to the Smart Object "layer" without damaging the layer structure, vector or text information.