That's exactly what happens. The Retron 5 rips the rom off your cart temporarily. It only keeps it until you remove the cart. The most interaction that it has with an original cart is that it can copy saves from and to the cart.
As for compatibility, it's hit-and-miss. For example, Virtua Racing for the Genesis worked until the last update. One time, they updated and completely broke Master System compatibility. Most homebrew won't work either, and even when they do, they come up as "unknown game" without an option to manually edit the title. There is no 32x compatibility.
As for lag, fighting games are unplayable using wireless controllers, and nearly unplayable with wired controls. Most other genres are playable though.
Edit: Almost forgot. You can play ROMS on it by simply IPS "patching" any game.