Correct. You also need to format such HDF in AmiKit.
In general, HDF is more compatible with Amiga files, especially with all its special characters that files can have. It might be faster too. And safer as well in terms that no host system can accidentally erase Amiga files located inside the HDF file. You can also create backup very easily - in host system you just backup the single HDF file. On the other hand, it is harder to set up HDF as you need to fiddle with HDToolBox on AmiKit side, at set up all values correctly according to the filesystem you chose. (Or just make a copy of AmiKit.hdf file, erase its content and rename the device name and you have a perfect SmartFileSystem HDF ready
The Directory is much more easy to set up - in WinUAE config you just point to a specific folder of your host system and that's it. But when copying files from that folder, especially using the host system itself and not AmiKit, you might lose specific Amiga file attributes and comments.