The “Ignore White Space” setting will get rid of any spaces surrounding closing/opening tags and any trailing spaces before closing tags as leading spaces after opening tags. Choosing to ignore white spaces may result in a gathering of every single text node without concerns for any former pretty XML indentation.
This is harmless if you already have a specific InDesign structure where every text node will be put into its own frame. But it will be an issue if you don't have any specific structure and try to import the XML content onto the page. Then the text will all be collapsed, with the exception of inner spaces.
An option is to use XML entities or hex/dec notation for spaces in the XML file, such as
, instead of the editor's default space character. Those won't be stripped by InDesign even if “Ignore White Space” is set.