yes it's totally correct and normal.
the button in the settings, as its description says, is only for showing/hiding Collections button from Edge toolbar.
it has nothing to do with sidebar.
also, the button on Edge toolbar is not the only way to access Collections.
you can still access it by using its shortcut (Ctrl + Shift + Y) or from Edge's (...) menu.
that's why the Collections panel should be visible and accessible. in fact, there isn't a way to disable Collections in Edge, it's a core functionality of the browser.