When you created the passkey, there was an option to store it on an external security key. It was probably some smaller text or a button towards the bottom of the confirmation dialog.

Since most users would prefer to store it in iCloud (or competitor) and have it synced to all their devices, that’s the default. But you can keep using external security keys in this new passkey-based world. You just have to opt-in to it.

And yes, I agree that external security keys offer better security, at the cost of a little convenience.