You do loose a little bit of quality when you down scale, but on a small screen it is very hard to tell. But it is a lot better than up scaling which can make the video look pretty bad depending on how much you are up scaling. It's always best to watch video at it's native resolution though.
On a small screen streaming 1080p or 720p and having it scale down should look virtually the same. Just test watching the same videos at 1080p and 720p. If both look just fine then simply stream video at 720p because it uses a lot less bandwidth and you are less likely to get stutters if there is a sudden drop in download speed.