I set Volumio up as you described. I used a 128GB micro SDXC card, which I can confirm will work. If I wanted a 256 GB card I’d take the Samsung EVO Plus, as that is listed on elinux.org as being compatible with RPi3 on Debian, which is the OS Volumio runs on.
I’m not aware of anything that would speak against this setup.
External HDDs, SSDs or large USB drives which protrude from the case are clunky solutions. There is simply something wrong when the storage device for audio files is larger and requires more power than the player it’s hooked up to. At least in terms of size, a nano USB drive works well, but in my experience these are highly unreliable, get very hot, and don’t last long when run 24/7. They sacrifice endurance for the ability to advertise higher read/write speeds.
For normal setups, the SD card is what the RPi boots the OS from. If you can use the same SD card for audio file storage I’d say that’s the best approach. This uses the least power, it doesn’t get hot, and it’s still far faster than anything you’d ever need for audio file playback. More importantly, any non-essential hardware you can remove from your setup makes it simpler and more robust, as there are fewer places where things can break or go wrong. That’s always a good approach.
Volumio shares the /data/INTERNAL/ folder over SMB, which is intended as the place where you store your audio files. This allows you to copy new music to your RPi over your LAN, without having to remove the SD card. I synchronize all music between my main storage (Synology NAS) and the RPi using rsync.
As an added bonus, an RPi without additional storage devices or cables hanging off it simply looks better.