Understanding Tracking Error in Passive Equity Investing

As a portfolio manager at a large asset management firm, you are evaluating the performance of one of your passive equity funds that is designed to track the S&P 500 Index. Over the past year, you've noticed some fluctuations in the fund's returns compared to the index. Tracking error, which measures the deviation of the fund's returns from the benchmark index, has become a point of discussion in team meetings. You wish to understand the implications of tracking error in a passive investment strategy better.

Which of the following statements about tracking error is accurate?