I have never done a reset that way only by removing the battery and holding the volume down key while holding the power button, however both techniques should get the same results.

On my phone the internal storage is called HTC storage and my sd card is /sdcard/ext_sd. So assuming you are the same than YES it will erase your sd card.

I always back-up everything on my computer before doing any reset or update, just in case.

I have never taken my card out and I also have everything backed-up on my Google account and on the auto back-up app. I have never lost any of my music or pictures or documents. I'm a back-up freak as you can see but that is from experience. Good luck.