A Stocks and Shares ISA remains one of the most effective wealth-building tools available to UK investors, with all returns sheltered from tax.
That tax-free compounding effect can make a significant difference to long-term investment outcomes, particularly for those holding quality stocks over many years.
Two FTSE 100 names currently stand out as worth considering for an ISA, given their recent share price weakness and underlying business fundamentals.
BAE Systems (LSE: BA.) has slipped more than 13% over the past three weeks, a notable drop for a company widely regarded as a core defence holding in many portfolios.
The decline has been partly driven by a spike in gilt yields, which recently pushed long-term UK government borrowing costs to a 28-year high, raising doubts about the pace of extra defence spending.
This concern has spread across NATO-linked defence stocks broadly, as multiple allied governments face similar fiscal pressures when committing to higher military budgets.
However, NATO allies have already committed to spending at least 3.5% of GDP on core defence by 2035, with countries like Poland going well beyond that threshold.
BAE also benefits from strong relationships in the Gulf region, where the continuing Iran war is expected to push oil-rich states to bolster their armed forces further.
The company reported a record £84bn order backlog in July, with first-half sales up 9%, operating profit up 11%, and earnings per share climbing 13%.
After the recent dip, BAE shares now trade at 21 times forward earnings, down from 28 times in March, and offer a forecast dividend yield of 2.2%.
For investors comfortable holding defence shares, the pullback arguably presents a more attractive entry point than was available earlier this year.
Turning to 3i Group (LSE: III), the £28bn investment trust has seen its shares fall 37% inside a year, creating what some analysts view as a compelling long-term opportunity.
The decline is largely attributable to concerns around Action, Europe’s fastest-growing non-food discounter, which now accounts for over 70% of 3i’s total investment portfolio.
Since 3i first invested in Action in 2011, the Dutch retailer has expanded from 250 stores to more than 3,400 across 15 countries, making it one of the most successful private equity investments in European retail history.
Action has encountered some growing pains in markets such as France, and the heavy portfolio concentration does represent a genuine risk that investors should weigh carefully.
Nevertheless, CEO Simon Borrows has stated that Action displays “some of the best store economics we have seen in a retail concept,” signalling continued confidence from management.
In the six months to 28 June, Action grew EBITDA by 13% to €1.1bn, demonstrating that the underlying business continues to deliver strong financial results.
Action also paid 3i a £254m dividend in the first quarter, while fellow portfolio holding 3i Infrastructure contributed an additional £18m dividend over the same period.
The FTSE 100 trust currently offers a dividend yield of 3.1% and trades at an 11% discount to net asset value, which income-focused investors may find particularly attractive.
Both BAE Systems and 3i Group carry their own distinct risk profiles, but each offers a credible long-term investment case for ISA investors prepared to look beyond short-term volatility.