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hi edmund,
in sharepoint online, we can’t completely change an existing folder to a document set, even when you change the folder’s content type to the document set content type. thanks for your understanding.
the best practice is to directly create a document set and move the documents from the existing folder into it. you can easily move multiple documents via open with explorer in internet explorer.
meanwhile, you can submit your requirements via uservoice, your ideas will be great appreciated.
best regards,
tim