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I would think so. The whole game is going to be installed on the hard drive, so there would be very little difference between retail games and downloaded games except having to have the disc inserted into your Xbox for verification.
You can instant switch with all digital games and a game that's in the tray. What people meant when they were talking about how you can't instant switch with a disc in the tray is that all games have a mandatory install, but you still need the disc in to instant switch. So, if you install a game, you cannot instant switch to it unless the disc is in the tray. However, if your games are digital, you can instant switch between any amount of them like you can apps.