I do not manage to understand how Level affects Fetishes. The rules (at least those which I have, W20 translated into Spanish) talk about Gnosis several times, but I do not find anything about Level, except in the Fetishes descriptions.
"Level" is a ranking of the power of a fetish. It comes into play when you allot your Background dots in Fetish; your rank in dots says how many combined Levels of fetishes you can start with. Three dots in Fetish will get you three Level Ones, a Level Three, or any other combination that adds to 3.
So Level does not affect gameplay, just character creation. It's a means of measuring power in a simple way.