The second option is very difficult (if not possible) to do. The XML fragment can we written out in multiple WriteRaw calls, so we could not assume that a single WriteRaw will contain a fully enclosed fragment. It can also be interleaved with other XmlWriter calls and nested many times – overall a very hard thing to implement properly. So that is why we have decided to treat the WriteRaw content as text, which is what you are seeing.
If you have an XML fragment in a string and you want to append it to XmlDocument, you can do it like this:

                XmlDocument doc = new XmlDocument();
                XmlElement rootElement = doc.CreateElement("root");
                rootElement.InnerXml = "<a/><a/><a/><a/><a/>";
                doc.AppendChild(rootElement);

Or if you really want to use the XmlWriter from XPathNavigator.AppendChild(), you can create an XmlReader over your fragment and use the WriteNode method on the XmlWriter:

                XmlDocument doc = new XmlDocument();
                XmlWriter writer = doc.CreateNavigator().AppendChild();
                writer.WriteStartElement("root");
                using (XmlReader r = XmlReader.Create(new StringReader("<a/><a/><a/><a/><a/>"), new XmlReaderSettings { ConformanceLevel = ConformanceLevel.Fragment } ) ) {
                    writer.WriteNode(r, false);
                }
                writer.WriteEndElement();
                writer.Close();
                doc.Save(Console.Out);