Smart Folders in Notes application

Smart Folders and tags in notes

I’m confused how Smart Folders work!

If I create two separate notes one containing the text #bike and another containing text #passports, tags are automatically created with those #tags, and every time you click on whichever tag that corresponding note with open with assigned tag (I get that!).

This is the part that confuses me!

Now lets say I create a Smart folder named ‘Holiday’ and then add  the two tags #bike & #passports  these are not added to the Smart Folder! Why? The only way I can seem to get them to appear, in a smart folder if each note Named ‘bike’ and ‘passport’ has the texted #bike & #passports  typed  into them both separately. Is this how it works or have missed something? 

If so, this seems strange that you would have to go back into those notes and then add #bike to my Passport note & #passport to my bike note for them appear when those #tags are not relevant to the separate notes. It would seem far more helpful if the smart folder would simple add the various # tagged files. I feel that Apple has missed something here, Unless I have!