In EndNote, "groups" are folders into which you can organize your references.
You can create groups as you wish, in order to organize your references. You might wish to make groups for each chapter of your dissertation or thesis, or for different assignments you are working on.
If you make custom groups and/or smart groups to help you organize your references, before long you might end up with a large number of groups. To help you organize your groups you can create group sets.
Smart groups are built with search strategies, for example, works by a particular author or matching some subject keywords. Smart groups are dynamically updated as you add references to and edit references in the library (that meet your smart group criteria).