Liquid 7.2 will edit HDV (which is MPEG2 at 25Mbps) out of the box, provided your PC is powerful enough. IIRC, Smetvid's extra codecs allow the bits that need to be rendered (transitions, colour correction, anything with an effect) to be processed at a higher bit-rate and therefore a higher quality. When you are ready to output (fuse or whatever) these sections are converted back to HDV standard - or are converted with all the other parts to your target output.
(AFAIK, it is not possible for AL to output MPEG4 - is it?)
For YouTube, I convert an HDV time-line to DivX 720P, which seems a good compromise between file size, image quality and render time. You can see some examples on my Steam Age Pictures YouTube pages.