A USB hard drive is worth having and it does not do everything. Microsoft states that backward-compatible Xbox One, Xbox 360 and original Xbox titles play directly from a USB 3.1 drive, while Series-optimized titles run from the internal SSD or a Storage Expansion Card.
Microsoft's support documentation is specific and it is worth quoting the distinction rather than paraphrasing it into something vaguer.
You can connect an external USB 3.1 hard drive or SSD to an Xbox Series X or S and play Xbox One games from it, including backward-compatible Xbox 360 and original Xbox titles. Those run directly from the external drive with no copying step.
Titles optimized for Xbox Series X and S do not run from a USB drive. They run from the console's internal SSD or from a Storage Expansion Card, which is a proprietary module. A USB drive can still hold them, which saves re-downloading, and you move them to internal storage when you want to play.
So the honest description of what a USB drive buys you is: a complete solution for your back catalogue, and a large cheap parking space for current-generation titles.
Because current-generation titles are not played from the drive, the interface specification is far less consequential than console storage marketing suggests. The drive holds data and hands it back. What you actually optimise is cost per terabyte.
That points at a desktop external hard drive, which is the cheapest storage per terabyte you can plug into a machine. A console sits next to a television beside a power socket and does not move, so the mains adapter that makes a desktop drive non-portable is irrelevant.
A portable bus-powered drive makes sense if there is nowhere for a second power brick. A portable SSD is a defensible choice for a large backward-compatible library that runs directly from the drive, and a hard premium to justify otherwise.
Buy more capacity than you think you need. Modern installs are enormous and avoiding re-downloads is the entire point.
The Expansion Card is the only way to play Series-optimized titles from expanded storage, and Microsoft states games run from it with the same experience as internal storage. That is the point of a proprietary format.
It costs several times per terabyte what an external hard drive costs. For a library that is mostly backward-compatible, the external drive is clearly the better purchase. For someone who plays many current-generation titles and dislikes moving them across before playing, the card buys a different thing and is worth its premium to them.
The two are not mutually exclusive and a lot of people sensibly end up with both: the card for the games in rotation, the hard drive for everything else.
One practical note: both consoles reformat a USB drive into their own layout when you set it up as console storage, and the drive is then tied to that console family. Copy anything you care about off first.
Only the backward-compatible ones. Microsoft states that Xbox One, Xbox 360 and original Xbox titles play directly from a USB 3.1 drive, while titles optimized for Xbox Series X and S require the internal SSD or a Storage Expansion Card. A USB drive can store them, which saves re-downloading.
Yes, for two reasons. It plays your entire back catalogue directly, and it is a large cheap parking space for current-generation titles so you are not re-downloading a hundred gigabytes when you come back to a game. What it does not do is expand playable current-generation storage.
A hard drive, for cost per terabyte, unless your library is heavily backward-compatible and you want those titles to load faster. Since current-generation games are not played from the drive, the interface specification is not the constraint that console storage marketing suggests it is.
Only if you want Series-optimized titles playable from expanded storage. It costs several times per terabyte what an external hard drive does, so for a mostly backward-compatible library the hard drive is the better buy. Many people end up with both, sized for different jobs.