It works for some words, but not all of them. "iPhone" doesn't correctly capitalize, but other misspellings seem to fix themselves.
It may also depend on the app you're using. Some apps have very limited support for external keyboards--DocsToGo doesn't even support the arrow keys for movement within a document.
It doesn't bother me, the point of auto correction on the virtual keyboards is that they're harder to type on accurately. I don't need auto correct as much on a physical keyboard.