It seems to me - though I am not an expert like mrz, as I haven't extensively taught the relevant age group - that the 'read words on sight' / 'sound them out' thing is a cart before horse / horse before cart discussion.
Fluent readers appear to read the vast majority of words on sight (I believe that there is some research that shows that they do actually scan and decode all through the word, but the process is so fast as to be at a practical level indistinguishable from reading on sight).
Children learning to read, and anyone attacking an unknown word, need a way to 'decode' a word. It cannot be read as a 'whole word on sight', because it is as yet unknown.
Phonics is an explicit way of teaching someone that process, and of giving someone the tools they need to attack any word.
So by teaching phonics systematically and well, reading can be taught with the greatest efficiency and effectiveness to the greatest proportion of all children - who will then pass on to the 'apparent reading on sight' stage for the vast majority of words but will still have their tool-box available for any new words.
If a child is taught ONLY by whole word 'look and say' methods, there is no 'tool' to attack a new word UNLESS the child makes the implicit connections between symbol (grapheme) and sound (phoneme) for themselves. That is a much more hit and miss method, as research demonstrates.
By advocating 'look and say' / whole word methods, I suspect that the intent was to put the cart before the horse - to replicate what fluent readers appeared to do, (unwittingly) without supplying any explicit teaching that would allow beginning readers to get there.
L&S, I will say again - if your child is indeed a good reader, then they are on the wrong book band., purely and simply, and the phonics readers vs non phonics readers is a red herring - she is simply being provided with a few words per book to get her teeth into to use her (implicitly worked out by herself, I would hope, as you will not always be there to read a new word for the first time) new decoding skills, where she could be given full books-worth of such vocabulary if she was on the correct book band.
If yellow books, whether decodeable or not, are in any way suitable for her, she is not a good reader. A genuinely very able reader of her age - which is what you want to imply she is - would be reading Roald Dahl-ish books independently. Without saying it too many times, DS went from unable to read, to self-taught mastery represented by long chapter books of the Roald Dahl type in 8-9 months - all I did was read to him when younger, and listen to him read as he progressed, no explicit teaching. Given the length of time that you have been explicitly teaching her to read, I would suggest that your methods may be less than efficient.