Unless you exclude them from backups, Time Machine will back up all items in iCloud Drive as long as they’re stored locally when the backup is made.
dataless file
Overview of clone files, dataless files, sparse files, symbolic links, and firmlinks, and how used and free space is accounted for in APFS.
Step by step through moving to iCloud Drive, eviction to a dataless file, materialisation of local data, editing and syncing with iCloud Drive.
What was the biggest and most important change in macOS this year? Pets in the People album in Photos, AirTag sharing, or iCloud Drive?
What are dataless files, and how do they work with iCloud and third-party cloud service providers? How can you tell whether a file is dataless?
It can take many hours for files to be downloaded from iCloud. Apps must be able to cope with that, but how well does macOS?
The Eclectic Light Company 