An external reference (XRef) in AUTOCAD is a ‘drawing within a drawing.’
In other words, it is an AUTOCAD drawing that exists as a link within the drawing that you’re currently working. Of course you will be able to view the content of this drawing but unable to make changes, unless otherwise required.
The use of AUTOCAD Xrefs is a good way to get information layers within a drawing, without including the various graphical entities that comprise it. Thus, depending on the ultimate goal of the drawing that you are doing, you can establish what information is to be referenced through this tool of AUTOCAD.