You said: "But when I populate the Link to: box with the URL".
Would I be correct in assuming that you are attempting to link to an external URL such as http://www.Google.com or something like that, that is external to your help system?
If so, I'm not surprised that the option fails to work for you. And I'm doubtful it's a bug, but more of a lack of documentation as to why that feature isn't available when linking outside the help.
Exactly, it is an external URL. However, it did do that, too, when I tried it with an image file in the project. Either way, this seems like it should be controllable this way. Choosing New Window from the Display in frame drop down opens it up in another browser tab, but it's not the same experience for the user.
There are some ways you might work past the limitation.
One way would be to create a topic that performs a redirect to the desired URL. Then pop that topic up.
The other way is similar. Create a topic containing an Inline Frame (IFRAME) and configure the IFRAME to point to the desired URL. Again, you would pop up the topic containing the IFRAME.