In a QListWidget with dragDropMode set to QAbstractItemView::InternalMove, items can be drag-and-dropped up and down freely. However, when you give the widget a spacing, an item dragged onto the area where the spacing is (which can be large depending on what you set it to) will get dropped to the bottom of the list as if it was dragged onto the empty area of the widget below the items.

It should rather end up between the items where it's dropped.

Sample project and demonstration video attached.