From the experts:
Elmo, like fellow Sesame Street characters Kermit and Grover, has a hard time being taken seriously. (It isn't easy being red either.)
But Elmo also calls to mind the image of St. Elmo's fire--the light show sometimes visible around ships' masts during storms at sea, which is quite appropriate since Saint Elmo (another name for Erasmus) is the patron saint of sailors. St. Elmo's Fire was also the title of a classic Brat Pack film of the 1980s.
There were a lot more Elmos around a century ago, when Elmo was in the top third of the popularity list.