Understanding Tracking Error in Passive Equity Investing

A large institutional investor, Alpha Asset Management, has built a passive equity portfolio designed to track the S&P 500 index. Over the past year, Alpha has reported a tracking error of 0.5% relative to the index. This tracking error is defined as the standard deviation of the active returns of the portfolio compared to the index.

During a quarterly review, the performance analyst noted that the tracking error can be affected by several factors, including the volume of trading, the choice of investment vehicles, and the timing of cash flows into and out of the portfolio.

Given this context, which of the following statements correctly describes the implications of this tracking error for Alpha Asset Management's portfolio?