“Copy files to media folder” was probably more important when iTunes managed video as well as music. In fact my media-server Mac still runs iTunes/Mojave and all the video files (>1tb) are on an external hard drive (the Copy Files setting is unchecked). Music files are on the Mac hard drive.
Dragging new video from the external drive to the iTunes window adds them to the library (but not the Mac hard drive). The default type is “Home Video” so I sometimes need to select “Video Info” (right click) and change them to Movie or TV Show. Having files on an external drive does seem to slow down this process but once the library is complete iTunes/Homesharing works well.
My main Mac - an M2 Macbook Air - has the photo library on an external SSD because the standard 500Gb out-of-box was too small. I just have to remember when travelling that I don’t have my main photo library and need to reselect it when I get home (and transfer new photos to it).