Finder - New right "Keep Downloaded" menu item

I have a Mac synced to iCloud. I thought all files/folders are stored locally if the following options are enabled.

I was browsing in Finder and found a new "Keep Downloaded" option in the right click menuI click the above Keep Downloaded option and I find a download icon next to a file.

I thought with the above options all my files are kept downloaded to my local hard drive by default??