I think I'm more bothered by my dd not knowing the words than she is because she asks what everything is!!! Sometimes I'll tell her, other times, to finish, I just tell her to keep reading.
We are almost to the halfway point and read Pathway readers and other I Can Read type books for practice.
She's a good reader, at least I think. She's my first so I have nothing to compare her to, but she's remembering the way PP teaches to split the word up to figure it out.
So while PP is not as fun as I would like, it seems to be getting the job done. And we do ETC too.
All that to say....the unknown words double as vocabulary for us. If it's a word.