Understanding and Minimizing Tracking Error in Passive Equity Investing

As an investment analyst for a large institutional investor, you are tasked with evaluating the performance of a new passive equity index fund that aims to replicate the performance of the S&P 500 Index. Your research has revealed that the fund has a tracking error of 150 basis points over the past three years.

In your response, discuss the significance of tracking error for passive equity investing. Analyze potential causes of tracking error and how it may affect an investor's perception of the fund’s performance. Additionally, propose strategies to minimize tracking error while maintaining the fund's objective of closely tracking the S&P 500 Index.