Folder browsing doesn't require indexing and would be unaffected by any changes made to tagged searching. It is tagged searching that would be slower if it were moved to the SD card, Slower tagged searching would affect those with fewer than 5800 tracks total (not on each card), but would offer the benefit of allowing those who do have more than 5800 tracks combined to use tagged searching, which won't work at all now, because it stops indexing when it reaches 5800 tracks.
Different people use portable devices in different ways. From the request for armbands, it is clear that some want a device that they can take on their morning jog or to the gym. I'd agree that those people don't need their entire library with them, and would be more interested in playlists than in tagged searches. However, some people (including myself) want to take the X5 on long-haul flights, to the office, or to friends houses to connect to their stereo systems. For us, tagged searches are very important because we have no idea what we're going to want to listen to until we actually decide to listen to it.
I don't have any mp3s on my X5. I bought it specifically because it offered similar functionality to my iPod Classic, but permitted the use of hi-res, lossless file formats, and has better audio quality than the iPod. I've re-ripped my CD collection to ALAC (so my wife can have a subset of my collection in the iPod Classic) and it just fits on two 64 Gb SD cards. It consists of considerably more than 5800 tracks. I can live with folder browsing now that gapless is fixed, but it would be very nice to look for "jazz" or "Miles Davis" or whatever, if that's what I'm in the mood for.
The X5 is a portable device, but it is not an iPod Shuffle. It was specifically designed in contemplation of large, lossless music collections which is why it has 2 SD slots, will support up to half a terabyte of storage (when the larger cards are released to market), and has an OTG feature that allows virtually limitless amounts of music. I don't think it's fair to simply dismiss it as a "portable device," when there is already a clear demarcation within the portable device market between casual, limited listening devices, and more comprehensive machines. I think a good analogy is between the iPod Classic and the iPod Shuffle -- both appeal to different types of listeners. However, the iPod Classic can do what the Shuffle does, albeit at the penalty of more weight and size. The Shuffle, however, cannot do what the Classic does, which is provide comprehensive access to a large music collection. The X5 is the audiophile analog of the iPod Classic, not the iPod Shuffle. That it is capable of serving Shuffle-like needs doesn't change its inherent nature. In fact, in response to the armband request, James has already said that Fiio wasn't considering this particular accessory, and that the upcoming X7 is designed to fulfill that kind of function.
I am sure, however, that, whatever Fiio does, it will be a well-considered decision and that almost all of us will continue to love these nifty little machines.