Virtual channel acts like a channel but its content is not retrieved from the internet. Instead it checks newly retrieved posts from source channels and gathers only those posts which match with its filters.
Each virtual channel can have one or more filters. These filters basically check occurances of specific words in the content of posts. When post matches with the criteria of any filter, that post is moved into that virtual channel.
Other than setting filters, you can also set the source channels, that is, on which channels virtual channel should apply its filters to collect matched posts. By default, virtual channels check all subscribed channels and bulk channels.
To learn more about virtual channels and comparision against word watchdogs, check the related help topic.