Best phone/personal listening device under $500

Definitely look at the lightning to USB->Dragonfly red or Cobalt it's a setup that doesn't add a ton of bulk.  The Onkyo HF player allows you to play FLAC files which is what made me go in that direction with an iPhone awhile back.  Not mind blowing but very good sound on the go.
Yes the Fiio players are good for the price I picked up a little M3 I think it's called recently which is an apple watch sized touch player and it's surprisingly good for the money and its size.  Maybe even better than the Dragonfly Red.
It's too bad the Pono never took off or evolved it was a really fine sounding DAP with mediocre form factor and battery life unfortunately...

Does this mean that I am bypassing the internal DAC in the phone and solely using the USB DAC for the digital conversion?

Yes, at least it does using the Apple Camera Adapter with the Dragonfly.  Can’t speak to the Microstreamer. 

^^^YES,the Camera Adapter bipasses the Apple DAC & sends a direct stream,doesn't matter whats downstream as long as it has Digital Audio in & built in DAC....This was really big years ago...