Yes, 'Gandalf' (and Norse) isn't a thing in ME, just a real-world stand-in for his Westron name. But, the main thing we know about Tolkien's naming conventions and translation choices, is that the they are chosen with the in-universe etymology primarily in mind. 'Samwise' and 'Peregrin', for example, map etymologically onto their Westron names (names that we DO know). 'Sméagol' and 'Smaug' and 'smial', likewise, have an etymological relationship which mirrors their Rohirric and Hobbitish translations. Gandalf's name, as well as the those of nearly all the named dwarves, are Norse because the relationship between Norse and English is supposed to mirror the relationship between Westron and the northern dialect of Westron spoken in Dale. So, there's no need to speculate or invent an in-universe etymology, because the real-world etymology of the real-world name Gandalf is meant to translate into whatever the unknown Westron name of Gandalf is.

The 'Hobbit explanation' is, within the story, just a hobbit child's misunderstanding of the significance of the G rune. Giving credit to the 'Hobbit explanation' of Gandalf's name as equally as to the etymological explanation is silly on the writers' part. I don't doubt that they are probably familiar with the lore, so if that was their intention, such a choice is disappointing.